Dodd-Frank Repeal Bill: What Does it Mean?

Galen Stops takes a look at Republican attempts to repeal the Dodd-Frank Act.

On Thursday last week, the US House of Representatives approved the Financial Choice Act (Choice Act), which would repeal major elements of the Dodd-Frank Act. But what does this actually mean in practice?

Well, if it is enacted, the bill passed by the House will lead to a whole range of changes to Dodd-Frank. 

For starters, under the heading “Regulatory Relief for Strongly Capitalised, Well-Managed Banking Organizations” the Choice Act would implement significant changes to Title I, altering the remit of the Financial Stability Oversight Council (FSOC).

For example, it would repeal the authority of the FSOC to designate non-bank financial companies as systemically important financial institutions (SIFIs), and retroactively repeal its previous designations of non-bank financial companies. It would also eliminate FSOC’s authority to designate particular financial activities for heightened prudential standards, which includes the power to mandate that an activity be conducted in a certain way or be prohibited altogether.

Under the heading “Ending Too Big to Fail and Bank Bailouts” the Choice Act would repeal Title II of Dodd-Frank, the Orderly Liquidation Authority, which is at the heart of the anti-bailout provisions contained within the legislation. It would replace Title II with “a new chapter of the bankruptcy code designed to accommodate the failure of a large, complex financial institution”, according to the executive summary published by the House.

The new bill would also, as one Washington-based source describes it, “take a meat axe” to the Consumer Financial Protection Bureau (CFPB) and repeal the Volcker Rule.

In addition, the Choice Act would offer banks relief from many of the Dodd-Frank regulations provided that they comply with a system of capital reserves outlined in the legislation.

These are just among the highlights of how the Choice Act would impact the provisions laid out in Dodd-Frank and, suffice to say, in its current form this impact would be massive.

Dead on arrival

The next question then becomes: will the bill be able to pass in the US Senate?

Not according to Justin Slaughter, a partner at Mercury Strategies, a Washington-based consultancy firm. He claims that the Choice Act “will likely die quickly and quietly in the Senate”.

Expanding on this view, he notes: “So much of what the Republican leadership in the Senate, or in Congress generally, aims to do this year requires very precise congressional procedures to work, and the most famous of these is reconciliation. The problem is that they only get one reconciliation per year, and reconciliation can only do things that are budgetary. A lot of what’s in the Choice Act is not budgetary.”

Given that the reconciliation – a legislative process that allows passage of a budget bill not subject to filibuster in the Senate – for this year is aimed at healthcare and the next one is expected to be focused on tax reform, Republicans are unlikely to be able to achieve Dodd-Frank repeal or reform through reconciliation until 2019, says Slaughter.

If the provisions contained within Choice Act are not enacted via reconciliation, then they need to garner 60 votes in the Senate and Slaughter says that Republicans “don’t have anywhere near that” right now.

One Washington-based financial services lobbyist explains that the Choice Act would probably be dead on arrival under normal political circumstances, and yet these are anything but.

They point to how polarised the political environment in Washington has become, with the Democrats resisting the Trump administration on everything from nominees, to policies on taxes, healthcare and immigration. Meanwhile, the Republicans, they say, are not even reaching out to their Democratic colleagues in the Senate to discuss the revisions they are planning to the American Health Care Act (AHCA). In such a polarised environment, getting to 60 votes in the Senate for financial services regulation reform becomes an even more daunting task. 

Matthew Kulkin, a partner at Washington-based Steptoe & Johnson, agrees that the 600-plus pages of the Choice Act “probably won’t move forward in the Senate”.

He adds: “Last Wednesday, we saw the Senate Banking Committee in the Senate release 130 proposals that they’ve received for ways to either amend Dodd-Frank or and grow the economy. I think that these principles will form the baseline for a Senate product, and whatever the Senate proposal comes up with in the end will ultimately be shorter, more focused and more moderate than the House bill. In theory, what will happen is that the Senate will pass a more moderate, bipartisan consensus bill and then the two chambers will they’ll have to go to a conference and negotiate a compromise between the House bill and the Senate bill that both parties can live with.”

Likewise, the lobbyist says: “I don’t see the Senate doing any bank regulatory relief at least until winter, and they’re not going to use the Financial Choice Act as the base text, they’re going to draft their own bill. If they manage to get something passed it means getting the Democrats on board, which means that they’ll have to leave out some of the eye candy in the Financial Choice Act related to the Orderly Liquidation Authority and Volcker repeal, while the changes to the CFPB is not something that the Democrats in the Senate will agree to.”

Different agendas

But it’s not just the Democrats that might prove a challenge to making the Choice Act a law. The lobbyist points out that, despite the House passing the Choice Act, financial services regulation reform does not seem to be anywhere near the top of the agenda for the Trump administration.

Speaking before the Senate Banking Committee in March, US Treasury Secretary, Steve Mnuchin, said that reform of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac is a priority, while he has also made clear on numerous occasions that tax reform is high up the administration’s agenda.

When the House had a hearing on the Choice Act in April, the Trump administration apparently did not send anyone to the event to act as a witness or weigh in on what the administration thinks about the proposal, which is an unusual move, considering how big the impact of the Choice Act would be if approved.

Then in May, Mnuchin, as head of FSOC, directed the five agencies responsible for the Volcker Rule – the Board of Governors of the Federal Reserve System; Office of the Comptroller of the Currency (OCC); Federal Deposit Insurance Corporation (FDIC); Securities and Exchange Commission (SEC); and Commodity Futures Trading Commission (CFTC) – to look at ways to reform the Volcker Rule. This is at odds with the proposal in the Choice Act to scrap the Volcker Rule altogether.

“I think that the administration is not necessarily focused on financial services regulation to begin with, and it appears that they’re not in the same place as the House of Representatives and Chairman [Jeb] Hensarling,” says the lobbyist.

All of which does not bode well for the future of the Choice Act.

So, if the bill is unlikely to survive in its current format, why did the House bother pushing it through?

Staking out a position

There are a few theories regarding this question. One is simply that, by introducing a bill that is very heavily slanted towards achieving conservative goals, it ensures that even when it is matched up against the more moderate Senate bill, the resulting product still leans further towards the Republican conservative agenda.

Another is that, while being seen to go easy on Wall Street is not a particularly popular move in the current political climate, what is popular amongst voters is reducing the regulatory burden on small community banks.

Importantly, Kulkin notes that there are a handful of Senate Banking Committee Democrats that are on the Senate Banking Committee that are up for re-election in 2018, and he says that they will want to be seen by constituents as providing regulatory relief for small local banks and working for compromise in a Republican led Senate by voters in their constituencies.

Yet it’s worth pointing out that, despite the complaints from the banking industry about the burden placed upon it by Dodd-Frank, data from the FDIC released in March shows that American banks generated profits of $173.3 billion in 2016, an all-time record high. These figures are almost certainly going to be touted frequently by critics of the Choice Act, and Dodd-Frank reform more broadly, going forward.

Another potential reason why Congress has pushed the bill though in its current form is simply because it’s been a long-stated promise that the House would repeal certain elements of Dodd-Frank and it has been a priority of Congressman Hensarling, also Chairman of the House Financial Services Committee, for some time.

“As a former House staffer, I’ll say that when I was counsel to the House Committee five years ago, I saw a lot of bills that were passed in the House just to die in the Senate that were really only about staking out a position. This might be a continuation of that trend,” says Slaughter.

One Washington source suggests that the House could “be accused of fundraising rather than really legislating” by passing this bill that they knew in advance would never make it through the Senate.

However, perhaps the most succinct description of the House decision to pass the Choice Act comes from one Washington source who, quoting William Shakespeare, describes the move as “full of sound and fury, signifying nothing”.

Galen Stops

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