House Financial Services Committee Chairman Jeb Hensarling (R-Texas) today announced plans for new legislation that he called a “market-based, equity financed Dodd-Frank off-ramp.” The Financial Choice Act would effectively roll back the Dodd-Frank Act’s regulatory regime by allowing banks that elect to hold high capital levels to be exempt from certain regulatory requirements of DFA and Basel III.
Hensarling said that Dodd-Frank has imposed excessive regulation on the financial system, particularly on community banks. “We are losing, on average, one community financial institution each day — and they are not dying from natural causes but from the sheer weight, volume, complexity and expense of Washington’s rules,” Hensarling said. “[E]nding and replacing the mistake of Dodd-Frank is the necessary start if we ever hope to restore real economic growth in America.”
To take advantage of the regulatory exemptions under the Financial Choice Act, banks would need to have a composite CAMELS rating of 1 or 2 and maintain 10 percent non-risk weighted leverage ratio — a significantly higher standard than those currently required by DFA or Basel III. “Banks will opt into the…new regime only if it makes them more competitive — in other words, if it lets them better serve customers at lower cost,” Hensarling said.
In an alternative approach to addressing “too big to fail” institutions, Hensarling’s plan also replaces Dodd-Frank’s Orderly Liquidation Authority provision with a new chapter of the Bankruptcy Code designed to accommodate the failure of a large, complex financial institution, repeals the authority of the Financial Stability Oversight Council to designate firms as systemically important and restricts the Federal Reserve’s ability to make discounted loans or bail out financial firms or creditors. In addition, Hensarling’s proposal would reform the Consumer Financial Protection Bureau, impose enhanced penalties for fraud or deception and create greater opportunity for investment by repealing the Volcker Rule and other DFA provisions limiting capital formation.
Securing regulatory relief for banks of all sizes is at the heart of ABA’s Agenda for America’s Hometown Banks, and the association today said it appreciated Hensarling’s contributions to the conversation on Capitol Hill. “Members from both sides of the aisle agree that parts of Dodd-Frank just aren’t working. Any law that generates more than 24,000 pages of proposed and final rules will inevitably include problems that should be fixed,” said ABA EVP James Ballentine. “We look forward to working with the committee and anyone who will help remove obstacles that make it harder for America’s banks to serve their customers and meet the needs of their local communities.”