On Wednesday, House Financial Services Committee Chairman Jeb Hensarling announced the main features of his comprehensive plan to replace Dodd-Frank, the flawed response to the financial crisis. Overall, the plan, called the Financial CHOICE Act, contains many features CEI has long advocated, together with some new approaches that look promising. There are one or two concerns from CEI’s free market perspective, but overall the plan provides the comprehensive alternative that provides the basis for debate as the initiative moves forward.
The plan comprises seven sections that would serve as titles for a bill. It is worth looking at each in turn.
Section One deals with capital controls on banks, which have tightened as a result of Dodd-Frank and the Basel III rules. The plan provides an “off-ramp” from strict supervision and regulation for banks that maintain high levels of capital.
Comments: The provision of an “off ramp” is welcome. However, there is very little historical evidence that requiring high levels of capital achieves much. Historically, when banks have not had to deal with the moral hazard of state bailouts, they have held capital levels appropriate for the risk of their activities. Banks that engage in low risk activities do not require high levels of capitalization. This paper from the Institute of Economic Affairs in London suggests that there is little need for capital requirements in a world free from state bailouts.
Section Two contains provisions aimed at ending “Too Big to Fail” and replaces the de facto state bailout authority of Dodd-Frank with a revised bankruptcy procedure.
Comments: CEI has long advocated for an end to the Systemically Important Financial Institution (SIFI) designation of a bank as “Too Big to Fail.” This section will go a long way towards ending this severe market distortion and increasing competition between big banks and their nearest rivals. It will also end the prospect of large non-banks like insurance companies being designated as SIFIs simply in order to have access to their cash reserves.
Section Three reforms the Consumer Financial Protection Bureau into a commission structure, gives it a dual mandate of consumer protection and promoting free markets, and requires independent assessment of its regulatory proposals.
Comments: The CFPB is in desperate need of reform, so much so that CEI is suing the federal government over its lack of constitutional checks and balances. Its lack of independent assessment over its regulation is a source of real concern. This section is extremely important for the prospects of the least well-off retaining access to the ready cash they need.
Section Four includes various regulatory reform measures, including the REINS Act, an end to Chevron deference, and greater oversight of the Federal Reserve.
Comments: This section is mainly “rules about rules,” as Nobel Laureate Douglass North put it. This sort of institutional reform has comprised a large part of our advocacy for many years. CEI has been a supporter of the REINS Act since it was first proposed, we lead a coalition supporting an end to Chevron deference, and have recently proposed reforms to the Federal Reserve that would promote a more honest price system.
Section Five looks to improve accountability in financial institutions through increased fines and punishments for individuals.
Comments: This section appears to have been included to assuage bipartisan anger at highly-compensated financial executives “getting away with it” during the financial crisis. Unfortunately, there is not enough detail for us to assess whether this is a just response to a problem of accountability or a problematic weakening of the corporate shield (which would have implications far beyond the financial industry). We shall have to reserve judgment on this section until more details are available.
Section Six comprises various reforms aimed at facilitating capital formation by abolishing the Volcker Rule and incorporating various bills aimed at facilitating investment.
Section Seven provides regulatory relief for Main Street banks, including several to do with Operation Choke Point.
Comments: It has been CEI’s consistent position that Dodd-Frank’s worst effects were inflicted on Main Street and community banks. Moreover, the Durbin Amendment to Dodd-Frank, capping interchange fees on debit card transactions, is now beginning to hurt smaller banks that believed they were exempt from the cap, as retailers are increasingly using payment networks that do not pay interchange fees to the banks. Finally, Operation Choke Point represents a significant abuse of power and needs to be restrained legislatively.
Overall, the Financial CHOICE Act should provide the basis for a vibrant, customer-responsive financial services industry in the USA, rather than one that is stultified and responsive only to regulators. Some concerns remain, but for the most part CEI welcomes this initiative.