Last week, the U.S. House of Representatives passed the Financial Choice Act. Introduced by Congressman Jeb Hensarling (R-Texas), it is intended to push back on the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010. The bill still needs to pass the Senate and be signed into law by the President, but is it a good thing or a bad thing?
We’ve put together some initial thoughts on the pluses and minuses of the Financial Choice Act as it passed the House.
Advantages
• Congressional oversight for new regulation: The bill seeks to reduce the government’s ability to create new regulation without Congressional approval. By subjecting all federal financial regulators under the Congressional appropriations process, the Financial Choice Act effectively puts in place a rigorous cost-benefit analysis for any new regulation.
• An “off-ramp” for small banks: The Financial Choice Act allows banks with leverage ratios of less than ten percent to be exempted from many of the more onerous aspects of Dodd-Frank intended for larger banks, which could be a major benefit for small banks.
• Unintended consequences: One might argue that Dodd-Frank has driven the most risky and innovative areas of finance from the heavily-regulated banking sector, where it can at least be monitored, to the less-regulated “shadow banking” sector. The International Monetary Fund (IMF) itself in 2015 estimated that the shadow banking sector in the U.S. had reached $15 trillion and that much of this growth had occurred post-crisis. Just the fact that estimates are required is an indication that the actual amount of capital at risk outside the banking sector is a question mark, and therefore its disposition and risk management is less well-understood by regulators.
Disadvantages
• Ending bailouts: At first glance this would sound like a good idea. Yet it’s worth remembering that both Republican and Democrat administrations followed through on the bailout along the lines proposed by Hank Paulson and Ben Bernanke. Certainly, you’d be hard pressed to find a non-partisan financial pundit who agrees that the bailout was not necessary to save the U.S. economy from collapse. The Financial Choice Act would make future action in a crisis much harder and could therefore exacerbate future emergencies. The bill seeks to end financial bailouts by eliminating Dodd-Frank’s Orderly Liquidation Authority, replacing it with a new chapter of the federal bankruptcy code, by imposing new restrictions on the Fed’s emergency lending authority, by prohibiting the future use of the Exchange Stabilization Fund for bank bailouts, and by limiting the FDIC’s authority to provide guarantees.
• Removes “the fiduciary rule”: The fiduciary rule expands the duty of care imposed upon investment advisers to brokers, insurance agents, and all financial professionals who work with retirement accounts, which forces those professionals to provide advice that is in your best interests. Given that many investors are unclear on the difference between investment advisers and others who simply are selling investment products, the fiduciary rule is useful to protect the most vulnerable investors, such as the elderly, from predatory practices.
Mixed Reviews
• Restructuring the Consumer Finance Protection Bureau (CFPB): The CFPB is intended to police deceptive or unfair practices in the financial sector. One of its functions is to maintain a publicly available database of complaints against financial institutions. While its intended goal is laudable and the database helps educate the public about bad actors in the financial sector, detractors have complained about its independent status, and thus the act seeks to make the CFPB more accountable to Congress.
• Removing the Volcker Rule: The Volcker Rule prohibits banks from proprietary trading. While we agree that keeping riskier elements of the financial markets within the most regulated entities allows for better oversight, proprietary trading has nothing to do with providing liquidity to the markets and therefore is less clearly beneficial to the economy. The risks of proprietary trading however, can be quite high.
The Financial Choice Act as currently written is an interesting, if highly partisan, swipe at Dodd-Frank. Yet Dodd-Frank has been excessively onerous, and some trimming is in order. One would hope that once the bill emerges from the Senate, a less partisan, more focused version of the bill will leave in place those elements of Dodd-Frank that protect Main Street and remove those parts of it than unnecessarily handcuff Wall Street.
Regards,
Ethan Warrick
Editor
Wealth Authority
