Hensarling: “Economic Growth for All, and Bank Bailouts for None” | Citizens Against Government Waste

Hensarling: “Economic Growth for All, and Bank Bailouts for None”

The WasteWatcher

On June 7, 2016, with the mantra “Economic Growth for All, and Bank Bailouts for None,” House Financial Services Committee Chairman Jeb Hensarling (R-Texas) unveiled the key principles of his proposal to replace the Dodd-Frank Act with “real reforms that work,” in a speech to the Economic Club of New York.

Appearing on CNBC, Chairman Hensarling noted that Dodd-Frank has failed, in part because the large “too big to fail” banks are even larger, while smaller community banks are even fewer.  If the chairman has his way, the planned introduction of the “Financial CHOICE Act,” which includes the acronym for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs,” will help prevent taxpayer bailouts of the large financial institutions (still a possibility under the current Dodd-Frank regime), and impose strong capital requirements on banks in exchange for relieving “growth-strangling” regulation.

In his remarks to the Economic Club, Chairman Hensarling assessed the impact of the Dodd-Frank Act:

Dodd-Frank’s false premise is that an alchemy of Wall Street greed, outsized private risk and massive Washington de-regulation almost blew up the world economy.  According to their narrative, this necessitated massive taxpayer bailouts and a functional occupation of our capital markets by federal regulators.  But financial regulation did not decrease in the decade leading up to the crisis – it markedly increased. In fact, regulatory restrictions on financial services grew every year between 1999 and 2008.  Financial services was, and remains, one of the heaviest regulated industries in the economy.  It wasn’t de-regulation that caused the financial crisis; it was dumb regulation.

Chairman Hensarling’s Financial CHOICE Act is based on the following principles:

  1. Economic growth must be revitalized through competitive, transparent, and innovative capital markets;
  2. Every American, regardless of their circumstances, must have the opportunity to achieve financial independence;
  3. Consumers must be vigorously protected from fraud and deception as well as the loss of economic liberty;
  4. Taxpayer bailouts of financial institutions must end and no company can remain too big to fail;
  5. Systemic risk must be managed in a market with profit and loss;
  6. Simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by the Washington powerful; and
  7. Both Wall Street and Washington must be held accountable.

In its lukewarm assessment of the bill, even The Washington Post found some merits to the proposal.  A June 11, 2016 editorial stated that, “[m]ore promising, and more creative, is Mr. Hensarling’s plan to offer relief from some of Dodd-Frank’s more onerous oversight provisions to banks that hold at least 10 percent capital as a buffer against losses … [S]uch a cash cushion can offer as much — or more — protection against financial instability as intrusive regulations do, and do so more simply.”

To qualify for the regulatory relief proposed in the Financial CHOICE Act, the larger banks would have to meet a real (not risk-weighted) capital requirement of 10 percent, up from the roughly 6 percent that they currently hold.  According to Chairman Hensarling, these behemoths would have to raise “several hundred billion dollars” to meet that 10 percent standard.  Instead, many of them may simply to opt to continue living under Dodd-Frank’s onerous regulations.  In Hensarling’s view, that would be a legitimate business decision, but one based in the context of a broader menu of market-driven choices.

Equally important, the benefits may be more significant to Main Street (with its closer ties to community banks) than to Wall Street.  The community banks are more likely to be in compliance with the 10 percent requirement already, so valuable resources could be diverted to more productive uses, rather than being obligated to cover wasteful compliance costs.  Indeed, in response to the unveiling of the legislative proposal, Camden R. Fine, the president and chief executive officer of the Independent Community Bankers of America (ICBA), said that “Chairman Hensarling’s common-sense reforms will free up resources that can be used to make loans, promote economic growth and create jobs in local communities nationwide.”

Other provisions in the CHOICE Act proposal include reining in the Consumer Financial Protection Bureau (a product of Dodd-Frank) and renaming it the Consumer Financial Opportunity Commission; replacing the congressionally unaccountable director with a five-member commission; allowing for legal challenges to be decided in arbitration; and further restricting the ability of the Federal Reserve to act as a “lender of last resort” during another financial crisis (something tantamount to a bailout).

Chairman Hensarling subsequently met with presumptive Republican presidential nominee Donald Trump, who has said that “Dodd-Frank is a very negative force, which has developed a very bad name.”  While the New York mogul has not publicly endorsed the CHOICE Act, which is not expected to advance very far in the limited time remaining for legislative action in the current Congress, the Hensarling bill could provide the substance for financial services regulatory reform next year.

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