The Financial CHOICE Act, the Republicans' proposal to provide an alternative to Dodd-Frank, has drawn mixed reviews since last week's unveiling by Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee.
Support for the proposal that promises “growth for all, bailouts for none” was divided sharply among party lines. Republicans cheered the proposal while Democrats decried it as too lenient and a return to the regulatory environment of pre-crisis days which eventually resulted in the financial crisis. Sen. Elizabeth Warren (D-Massachusetts) even called the proposal a “big wet kiss” for Wall Street.
While smaller banks say the CHOICE Act would bring welcome relief from the regulatory burden of Dodd-Frank, some of the larger banks did not meet the CHOICE Act with such enthusiasm, according to the House Financial Services Committee website.
According to Compass Point policy analyst Isaac Boltansky, the largest banks are unlikely to support the CHOICE Act because it would require them to raise hundreds of billions of dollars to secure regulatory exemptions. Also, he said, a switch at this point would “undermine the tens of billions they have already spent to comply with the Dodd-Frank Act.”
The CHOICE Act would allow lenders to escape international capital and liquidity standards if they meet a stringent, 10 percent capital-to-assets ratio.
Yet another banking industry source said, according to the House Financial Services Committee, “No banking organization that includes a securities business will ever qualify for relief under the Hensarling proposal because that would mean holding 10 percent capital against Treasuries and other liquid securities, which is uneconomic.”
Steve Williams, principal at Cornerstone Advisors, stated, “I see it as more of an attempt to take out some of the micromanagement aspects of Dodd-Frank. I don't see the threat that this is 'back to letting the bank's horses run free' as true because there are a lot of capital requirements, new international capital standards, stress testing standards, and other things that are in place now as well as very rigorous examinations from the Federal Reserve, the Comptroller of the Currency and the FDIC. So I think it's more of a trying to find the right middle ground structure.”
As far as the components of the CHOICE Act, Williams said he is in favor of taking another look at the Consumer Financial Protection Bureau, “because I think that has been very difficult for all sized institutions to absorb the impact of that. It's been very costly. The vast majority of institutions that never did anything deceptive to consumers were paying a price there, so I think taking a fresh look at the CFPB is a positive thing. I think things like letting the banks hold capital as opposed to being deemed systemically important by the Financial Stability Oversight Council— to me that's trying to find common sense middle ground so that these large institutions aren't at risk. A small group of people might deem them very complex organizations and have them taken away, so to speak, or deemed that they are insolvent versus holding higher levels of capital and liquidity.”
Another key portion of the CHOICE Act includes removing the bank proprietary trading ban known as the Volcker rule. Williams said, “If there's anything that should always face scrutiny, it's that kind of income generation under the same umbrella as an institution whose deposits are insured by the taxpayer. I think the part about the Volcker rule should be looked at very rigorously because you never want to be promoting speculation while insuring essentially the liabilities or deposits of that institution with taxpayer guarantees."
Williams said he believes that some type of regulatory relief is necessary even if it is obtained through other legislation besides the CHOICE Act.
“The weight of the new regulation on the industry has been hard and I think it's been disproportionate to the 6,000 banks that fall below the top 100 banks in the country,” Williams said. “It's been unfairly pressing on them to the point where it's forcing consolidation in the industry. Then you always have the risk of losing some of that grass roots nature of the banking industry. I think regulatory reform needed to come. The tone that's been set with most institutions regarding consumer regulation when it was very much tied to a small group of bad actors than the whole community banking industry. This is a good discussion to have. I don't know if the CHOICE Act specifically is the perfect answer, but I think especially for the community institutions, there needs to be some type of relief.”