Financial Regulation

The Financial Choice Act Doesn't Repeal Dodd-Frank, but It's Still a Big Deal

The House approved the bill with a party line vote on Thursday, but it's prospects are dim in the Senate.

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Ron Sachs/CNP / Polaris/Newscom

The number of regulations on American banks has doubled since 2010, which means plenty of work for regulators in Washington but less time (and money) for banks to do the things they are supposed to be doing.

The culprit behind those growing piles of financial regulations is the Dodd-Frank Act, passed by Congress in response to the banking collapse that led into the so-called Great Recession.

Congress on Thursday took a step towards reducing those piles of regulations, as the House voted straight down party-lines to approve the Financial CHOICE Act. Though the bill is expected to face significant opposition in the Senate, its passage is the surest sign yet that Republicans are serious about rolling back Obama era regulations that force banks to spend more time (and money) dealing with government imperatives.

"This law may have had good intentions," said Speaker of the House Paul Ryan on Thursday, referring to the Dodd-Frank Act, "but its consequences have been dire." Republicans said the reforms contained in the Financial CHOICE Act would rein-in regulations that have made it harder for small banks to operate, while providing a better mechanism for unwinding large banks that become unstable.

Despite the rhetoric from both major parties in advance of Thursday's vote, the Financial CHOICE Act does not repeal Dodd-Frank and does not deregulate the financial sector. As Thomas Hogan, a professor of finance at Troy University, noted at The Hill, the bill actually leaves many Dodd-Frank provisions intact and puts "an emphasis on financial stability while trimming excessive regulations that have harmed consumers and business activities."

A major component of the House-passed bill would give small banks an escape from complying with the complex Dodd-Frank rules that attempt to stop banks from taking on too many risky investments. Though those rules are only necessary for larger banks, all financial institutions must abide by them. Under the Financial CHOICE Act, smaller banks would have the option of ignoring those rules if they maintain a larger reserve of cash as a backstop against bad investments.

Another key element of the bill would create a new chapter in the bankruptcy code to allow failing banks to be unwound through bankruptcy instead of relying on bailouts or government-imposed restructuring. Even though Dodd-Frank was passed, in part, to prevent future bailouts of banks deemed "too big to fail," the law may have created a regulatory environment that makes future bailouts more likely by giving the federal government a larger role to play.

Politically, though, the biggest change in the Financial CHOICE Act is the restructuring of the Consumer Financial Protection Bureau. As I wrote last week, the proposal would allow the president to remove the director of the CFPB at will, and would force the bureau to go through the congressional appropriations process (instead of getting its budget directly from the Federal Reserve). The bill also gives the CFPB a Senate-confirmed inspector general, requires cost-benefit analyses of CFPB regulatory proposals, and prevents the CFPB from collecting consumers' financial information without permission (something that it has a history of doing).

Democrats oppose the dismantling of Dodd-Frank and particularly dislike the idea of reining in the CFPB, setting up a potential battle in the Senate, where Republicans don't have enough votes to force the bill through without Democratic support—though some elements of the bill could be passed with a simple majority through the reconciliation process. During debate in the House, Democrats indicated support for some parts of the bill, which provides a potential way forward for some, but likely not all, of the Financial Choice Act.

Still, Thursday's vote is a sign that—even with controversy swirling around Washington and distractions aplenty—Republicans in Congress are serious about sweeping aside regulations.

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  1. Another key element of the bill would create a new chapter in the bankruptcy code to allow failing banks to be unwound through bankruptcy instead of relying on bailouts or government-imposed restructuring.

    Post 2006 phrase: “Too Big To Go Bankrupt”.

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  2. Wingnuts: BANKS CAN”T MAKE LOANS ANYMORE BECUZ OF ALL THEM OBAMA REGULATIONS!

    https://fred.stlouisfed.org/series/BUSLOANS

    1. Wasn’t this regulation *supposed* to reduce lending? The whole leftist spiel was/is that banks are lending too frivolously and need to be constrained.

      If the refs aren’t doing that (housing prices still going up nice and fast) you might be led to conclude that it was actually housing supply constraints driving up costs (largely due to “progressive” housing regulations).

      Well, you wouldn’t, because you’re retarded, but other people might realize it.

      1. Wasn’t this regulation *supposed* to reduce lending?

        No, you idiot. The Dodd-Frank law was intended to INCREASE lending and DECREASE prop trading and derivative speculation.

        1. An aim of the law was to increase consumer and commercial debt? Really?

    2. “BANKS CAN”T MAKE LOANS ANYMORE BECUZ OF ALL THEM OBAMA REGULATIONS!”

      Needs more caps, asshole.

  3. Republicans in Congress are serious about sweeping aside regulations.

    Let’s not go that far.

    1. References facts not in evidence

  4. There’s a college article by some new guy. Did Rico die while I was away?

    1. Robby is on sabbatical writing a book.

  5. Republicans in Congress are serious about sweeping aside regulations.

    Uh huh. Sure. I guess that is how you see it.

    The way I see it is: Democrats pass huge steaming pile of regulations while in the majority, Republicans rail against it using free market rhetoric while in the minority only as a means to achieve power, and then when Republicans are in power, suddenly, all of that rhetoric turns into “well, let’s just trim a little bit here and there on that well-intentioned idea that the Democrats came up with”.

    The Republicans have adopted the same premises as the Democrats – that banks should be centrally regulated from DC. They only differ on whether the number of regulations should be “very large” or “very very large”.

    1. Democrats pass huge steaming pile of regulations while in the majority, Republicans rail against it using free market rhetoric while in the minority only as a means to achieve power, and then when Republicans are in power, suddenly, all of that rhetoric turns into “well, let’s just trim a little bit here and there on that well-intentioned idea that the Democrats came up with”

      Oh – you noticed that? I suppose it’s on to Plan B, then. . . .

      Even Boehm, here, accepts the paradigm that these regulations are “necessary for larger banks.”

      I thought Friedman made a pretty good argument that they aren’t.

      But if there’s one narrative that has an ironclad grip on most of the populace, it’s that a lack of regulation caused the Great Depression and that banking regulations passed since the Great Depression are the only thing that has saved us from another one.

      1. Friedman compares the 1929 crash with the 1907 crash and makes a convincing case that the Fed had a significant hand in causing the crash in 1929, and that attempts to control the damage via banking regulations (among other things like the disastrous Smoot-Hawley Act) made the resulting depression an order of magnitude worse and much longer than it otherwise would have been.

        The recession following on the 1907 crash lasted a matter of months, but had been probably the biggest economic disaster the country had yet faced.

        It’s not unlike the opium problem they thought they had in the 19th century, which kicked off what ultimately became the Drug War. I desperately want to be able to go back in time with a copy of The Wire and say “you think you’ve got a drug problem now?”

      2. Unfortunately your assessment is correct. I just read a Reuters article about the CHOICE act and all the comments that followed were the basic arguments of banks are bad, regulations are good, and the only thing that saves us from another depression is more government involvement in the banking industry. Of course the article was slanted towards those same sentiments. It was a disappointing start to the day.

  6. The House approved the bill with a party line vote on Thursday, but IT IS prospects are dim in the Senate?

    Tsk tsk.

  7. Repealing Dodd-Frank means we go back to the bad old days when banks were legally allowed to kill your grandmother, grind up her corpse, shove it into a casing and sell it on the street corner as a hot dog. This shows the true evil of the GOP even more than the repeal of the EPA regulations that now allows Kellogg’s to market glow-in-the-dark plutonium-frosted Rice Krispies.

  8. I don’t trust the Senate to do anything with this.

    But oh well, it was a pretty good bill and will be remembered.

  9. “This law may have had good intentions,” said Speaker of the House Paul Ryan on Thursday, referring to the Dodd-Frank Act, “but its consequences have been dire.”
    The law did not have good intentions. The intentions were to eliminate small banks, and force large banks to become bigger in order to justify “reasonable regulations” leading to nationalization. It was Obamacare for the financial industry. Like O-care, it was set up to fail on the expectation that Queen Hillary would carefully explain that a federal takeover was ‘the only option’.

  10. When does the No Sector is too Big to Fail/Governments Desists Guaranteeing Banks Act, come out?

  11. The argument I’ve seen against this is that the banks got greedy, the economy took a dive, Dodd-Frank was passed to make everything better, therefore repealing even part of Dodd/Frank will lead to bread lines.

    If I remember right, Bernie Sanders argued that bread lines were good, so I’m not sure the Progressives aren’t just being disagreeable. They might want to have that looked at.

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