On Wednesday, the House Financial Services Committee, under the leadership of Chairman Jeb Hensarling, R-Texas, will begin hearings on the Financial Choice Act (Choice Act), House Republicans’ plan for replacing Dodd-Frank. The Choice Act is a marked improvement over Dodd-Frank, passed in 2010 by the Democratic Congress and signed into law by President Barack Obama, in response to the financial crisis of 2008.
A well-functioning financial services industry is vital to continued American prosperity. Thankfully the Choice Act offers a strong alternative to Dodd-Frank and the regulatory morass it created.
Rather than ending the “Too Big to Fail” problem, Dodd-Frank further entrenched the risk of taxpayer-funded bailouts for the largest banks and financial institutions while failing to address the root causes of the financial crisis. Likewise, by layering overly complicated regulations onto the financial system, Dodd-Frank stunted economic growth and limited access to capital. Finally, Dodd-Frank served as a grab bag for progressive activists’ wishes – regulating all sorts of industries and products wholly unrelated to the financial crisis.
The Choice Act offers a host of welcome changes. To begin, the bill would eliminate Dodd-Frank’s Orderly Liquidation Authority and replace it with a new chapter of the Bankruptcy Code that can wind down large financial firms.
OLA was designed to end the Too Big to Fail problem. Jeffrey Lacker, the former president of the Richmond Federal Reserve Bank, has warned that OLA has weakened the financial system. The federal government’s ad hoc interventions to save failing financial institutions created enormous moral hazard, and the OLA did nothing to improve this dynamic.
The Choice Act wisely repeals OLA and instead offers a new chapter in the bankruptcy code so that large financial institutions that engage in unsustainable practices can fail without posing fundamental risks to the broader system. This straightforward and predictable change, based on structural legal processes, would alleviate much of the “discretionary” bailout practices that can give rise to financial crises.
Likewise, the Choice Act repeals the ability of financial regulators to deem certain financial institutions as Systemically Important Financial Institutions. The SIFI designation process created a market expectation that certain firms would be rescued by taxpayers if they failed. This dulls market discipline while lowering the designated firms’ borrowing costs considerably as counterparties know they would be made whole by taxpayers in the event these institutions began to fail.
The broken nature of the SIFI designation process is typified by the failure of financial regulators to designate Fannie Mae and Freddie Mac as SIFIs, despite the fact that they are substantially larger than many of the financial institutions with such designation.
Perhaps most importantly, the Choice Act proposes a “regulatory off-ramp” from Dodd-Frank and Basel III capital, and liquidity standards. Rather than creating a flurry of complex rules in response to the financial crisis, Congress should have mandated higher capital requirements for financial institutions. The Choice Act recognizes that equity, the safest buffer in times of stress, offers financial institutions an option: hold more equity capital and receive relief from onerous regulations.
As for the regulatory process, the Choice Act would subject all financial regulatory agencies to the REINS Act and subject all regulators, including the Consumer Financial Protection Bureau, to the Congressional appropriations process to ensure greater oversight. This is an important change that will serve taxpayers well.
The Choice Act would also repeal the so-called Durbin Amendment, which was slipped into Dodd-Frank at the last minute and required the Federal Reserve to impose price controls on debit card interchange fees. This type of price fixing is misguided policy; markets, not government, should set prices.
These are just a small sample of the overwhelmingly positive changes the Choice Act would make to the financial services industry. Taxpayers should be heartened that the era of regulatory micromanagement of the financial services industry may come to an end this year.
Clark Packard (@clarkpNTU) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is counsel and government affairs manager for the National Taxpayers Union.
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