The Financial Industry – Unfettered Again?

If Republicans in the U.S. House get their way, the financial industry is about to get a big boost at the expense of consumers and the overall stability of our economy. The House is set to vote soon on the Financial Choice Act, which rolls back many of the regulations and restrictions on the financial industry imposed by the Dodd-Frank Act. Meanwhile, the Executive Branch has already exercised its power to ease enforcement and relax administrative rules and regulations.

Let me preface this by saying, I am by no means an expert in this area, but I’ve done my research, and history tells me that the direction we are headed could ultimately lead to another financial crisis. Lax regulation of the financial industry may “free up capital,” but the industry has proven that it can’t be trusted to self-police. While Dodd-Frank may have been overly-broad in some instances, that doesn’t mean the whole structure should be completely abandoned. We should all be calling on common sense to prevail.

A Brief History of the Oversight of the Financial Industry

After the Great Depression and the resulting failure of banks, the Glass-Steagall Act was passed in 1933 to prohibit depository banks from engaging in investment bank or insurance activities and vice versa. The idea was that depository banks, backed by the FDIC, should not engage in risky investments and thereby become “too big to fail.” It worked for a while but loopholes and work-arounds began to appear in the sixties until the Act was all but useless in 1999, when repealed.

The early 2000s saw even more deregulation of the financial markets, and everyone felt the economy was booming. But, it was only temporary: the financial crisis hit hard in 2008. We were suddenly faced with a number of institutions that were “too big to fail” and required a taxpayer bailout. The economy crashed, people lost their jobs, and many lost their homes.

In came the Dodd-Frank Act in 2010, which comprehensively (some would say, too much so) regulated the financial services industry. The Act was designed to prevent any future financial crisis and to primarily protect consumers.  While certainly not perfect, it has been effective at shoring back up the economy while protecting many consumers. All that may now be thrown out the window.

Dodd Frank vs. Trump Administration and proposed CHOICE Act

–          Dodd Frank limits proprietary trading and the amount of depository funds that banks may invest in hedge funds and other risky investments, albeit with several loopholes. This is known as the Volcker Rule, which became effective in 2015 with some exceptions. Nevertheless, the Trump administration has demonstrated its commitment to take any teeth out of the rule. http://www.huffingtonpost.com/entry/trump-killed-dodd-frank_us_591b3e92e4b05dd15f0beba7 The CHOICE Act, likewise repeals the Volcker rule.

–          Financial institutions are currently required to have sufficient capital to survive another crash, establish a “living will” resolution plan, and undergo “stress tests.”  Under the Choice Act, big banks are exempt if they maintain 10% capital, and requirements for other banks are watered down. http://thehill.com/blogs/pundits-blog/finance/333399-choice-act-takes-consumer-cops-off-the-wall-street-beat

–          Remember back when debit fee charges kept rising? That stopped because of Dodd Frank’s Durbin amendment, a.k.a.  swipe fee reform, which put a limit on fees that could be charged for debit cards. Although the original version of the CHOICE Act would repeal this amendment, http://www.prnewswire.com/news-releases/retailers-promise-fight-to-keep-swipe-fee-reform-as-financial-choice-act-heads-toward-full-house-vote-300 451810.html , the House has agreed to drop the repeal provision before they vote.  http://www.politico.com/story/2017/05/24/house-republicans-to-drop-debit-rule-repeal-238790

–          The Financial Stability and Oversight Council (FSOC) was designed to detect risk for financial failures before it was too late. Under the CHOICE Act, the FSOC will be crippled, particularly when it comes to oversight of nonbanks.  http://thehill.com/blogs/pundits-blog/finance/333399-choice-act-takes-consumer-cops-off-the-wall-street-beat

–          Likewise, the Consumer Financial Protection Bureau (CFPB) was established through Dodd Frank with broad authority to protect consumers, and, indeed, has recovered $12 billion for Americans who have been taken advantage of by financial institutions. The CHOICE Act cripples the CFPB by subjecting it to an annual appropriations process and stripping much of its power with a reorganization. http://thehill.com/blogs/pundits-blog/finance/333399-choice-act-takes-consumer-cops-off-the-wall-street-beat

–          Under Dodd Frank, the Securities and Exchange Commission has broad authority to go after both corporations and individuals through either administrative proceedings or civil suits. The CHOICE Act, severely restricts SEC enforcement power by focusing solely on individuals and limiting administrative proceedings. http://www.reuters.com/article/us-otc-sec-idUSKBN1852CY

–          Dodd Frank allows regulators to act early by putting institutions in receivership proceedings before bankruptcy. The Choice Act substitutes this “Ordinary Liquidation Authority” with a bankruptcy reorganization. They are calling this the “No More Bailouts” provision, but what will happen if a huge bank files for bankruptcy? That might be good for creditors, but it does nothing to help consumers or the overall health of our economy.

Meanwhile, some Democrats and Republicans have called for a “21st Century Glass-Steagall Act,” www.latimes.com/business/la-fi-glass-steagall-20170514-htmlstory.html, but Sen. Elizabeth Warren and Treasury Secretary Steve Mnuchin completely disagree about what that means. http://www.cnbc.com/2017/05/18/sen-elizabeth-warren-blasts-sec-steve-mnuchin-for-orwellian-double-speak.html.

Can We Not Find a Better Approach?

I believe we can, but we – the consumers and taxpayers – must bring our voices to the table and make sure that we are heard. Congress should be looking for bi-partisan solutions to continue to protect consumers from conflicts of interest within the financial industry, create a safety net to prevent financial failures, and ensure that those responsible for risky behavior are required to answer for it. At the same time, unnecessary and overly burdensome requirements can be adjusted and applied via a common-sense approach.

An opposing opinion from U.S. Rep. Barry Loudermilk (R-GA).