On Thursday, the country watched FBI Director James Comey testify before Congress. But that same day, the House of Representatives passed a bill that would strip oversight and regulation of the banking industry. It's called the Financial CHOICE Act.
Why is it important?
The bill affects nearly every area of financial regulation. It rolls back significant pieces of the Dodd-Frank Act, passed in response to the 2008 crisis. Here are a few major examples:
- It eliminates the "Volcker Rule," which prevents banks from using their own funds to make specific investments that increase their profits—and don't benefit their customers. The practice is called proprietary trading.
- It shrinks the Consumer Financial Protection Bureau by removing it's power to create rules or supervise financial services firms, allowing Congress to manage its budget, and changing its structure so the President can fire the agency director at any time.
- It exempts banks from certain regulations if they meet capital requirements, but increases the amount of capital necessary to meet those requirements in the first place.
- It removes the Orderly Liquidation Authority, which allows the federal government to take control of major financial institutions about to go bankrupt.
One obvious question: How will this play out in Congress? One caveat: It's a mistake to focus too much on the partisan drama (there's a lot of it) when the substance of this bill is so important. The short version is: Every House Democrat voted against the bill. Every Republican voted for it, with the exception of Rep. Walter Jones (R-NC). In the Senate, the lines are more blurry by necessity. A new bill would need to cross a 60-vote threshold, but there are only 52 Republicans in the Senate—so it can't be passed along the same partisan lines. Senate Republicans could instead pass a smaller set of changes to Dodd-Frank through reconciliation, a process that would only require 51 votes.
Would the regulatory changes in the Financial CHOICE Act benefit the country?
These changes would strip the country of the important protections we've gained since 2008. It brings us closer to another economic catastrophe, and leaves our economy and our personal financial security defenseless if it comes.
Take the Volcker Rule as just one example. Passed in response to the 2008 crisis, the Volcker Rule helps prevent banks from taking specific risky bets in a way that, even if they succeed, will only benefit the bank, not the customer.
So it begs the question: Why do Republicans want to pass this bill? The idea that the bill "ends Wall Street bail outs" on the backs of "hard-working tax-payers" is patently false. It relies on a misrepresentation of what the Orderly Liquidation Authority—the backup authority that implements a bail out—does. It does not use taxpayer money at all. In fact, the authority ensures that other banks with a stake in the bail out have to pay back the costs.
Why lie? Because this bill isn't about economic growth or opportunity in small communities. It's about pleasing wealthy constituents and donors. In a particularly unflattering moment, Republican Sen. Jim Inhofe gave a blunt answer to why Democrats should support this bill: "Even Democrats have bankers in their districts."
It also directly contradicts the President's own campaign promises. He made his soon-to-be-voters believe that "Wall Street has caused tremendous problems for us. We're going to tax Wall Street." From a Trump-supporters perspective, this bill should be viewed as a betrayal. That's not just bad for Trump supporters. It's bad for our democracy—where the public's trust in government is at all-time lows.
Simply put, this bill would take us back to the circumstances that led to the worst economic disaster since the Great Depression. And no matter what a banker thinks of his bottom line today, those circumstances are bad for everyone.
The bill strengthens the smart regulations we have and removes those we don't need.
The Orderly Liquidation Authority is obviously a burden on the American public in any way that it uses tax-payer money to bail out big banks. But even where it doesn't, this system for bail outs gives banks and easy out. It prompts them to take risks with customers financial futures in a way they couldn't if we held them responsible for their own behavior.
As House Finance Chair Jeb Hensarling (R-TX) put it, "taxpayer bailouts of financial institutions must end, and no company can remain 'too big to fail.'" One indicator that he's on the right track: Major banks are vocally opposing this removal of their fallback plan.
Opponents might like to cherry-pick this bill to make it seem soft on financial institutions. But the truth is the bill doubles down on important parts of federal regulation and makes it more difficult for banks to avoid oversight by holding capital assets themselves. "A key feature of the Financial Choice Act is the ability for any bank to avoid strict federal regulatory oversight if it holds capital of at least 10% of assets. The current requirement is 3% for most banks and 6% for institutions considered systemically important." In doing so, it holds banks to a higher standard. Don't want to be subject to strict regulation? Show us you can handle a crisis.
Dodd-Frank was a reasonable attempt to deal with serious problems after 2008. But parts of the act caused more problems than they solved. Some made mortgages harder to obtain, causing problems for families and a younger generation hoping to buy homes. Some forced banks to scale back fees that previously allowed them to offer free checking accounts, again harming young and low-income people most. And others placed a heavy burden on community banks, requiring them to live up to regulations that did not make sense and should not apply. It's time for smarter regulation.
- The text of the Financial CHOICE Act
- "To create hope and opportunity for investors, consumers, and entrepreneurs by ending bailouts and Too Big to Fail, holding Washington and Wall Street accountable, eliminating red tape to increase access to capital and credit, and repealing the provisions of the Dodd-Frank Act that make America less prosperous, less stable, and less free, and for other purposes."
- Former Federal Reserve chair Ben Bernanke on why Dodd-Frank’s orderly liquidation authority should be preserved
- "In my view, repealing Title II to eliminate the OLA would be a major mistake, imprudently putting the economy and financial system at risk. The OLA is not perfect—indeed, its implementation remains a work in progress—but it is an essential tool for ensuring that financial stress does not escalate into a catastrophic crisis. ... Under crisis conditions, the OLA (Title II) framework—which, unlike Title I, makes full use of the information and expertise of financial regulators—would be much more likely than a Title I process to safely unwind a failing, systemically important firm. Moreover, the existence of the OLA option does not institutionalize bailouts of failing financial firms. To the contrary, under the OLA all losses are borne by the private sector, not by taxpayers. Indeed, if no OLA were available, it’s more rather than less likely that some future policymakers would conclude that bailouts were the only viable option to protect the economy."
- Vox's explanation of the House bill and what comes next
- "Facing a global financial collapse, President George W. Bush and Congress quickly rallied behind an $8 trillion package to save the financial system—a package that didn’t allow the federal government to fire the bank’s managers or immediately take back its executive bonuses. Dodd-Frank’s defenders say Hensarling’s bill would put the next White House facing a bank panic in the position of having to go back to Congress, rather than having the means to both act quickly to avert catastrophe and ensure taxpayers recoup their spending."