The introduction of the CHOICE Act—the Republicans’ proposed alternative to Dodd-Frank—last month by Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee, has sparked even more fierce debate between the parties in his Committee. On Tuesday in a full Committee hearing focusing on the capital requirements of the CHOICE Act, the tension was evident as both sides presented their cases for why they believe the CHOICE Act would or would not help the financial industry and the economy.
Hensarling said in his opening statement that the CHOICE Act will offer “economic growth for all and bank bailouts for none.” But according to Rep. Maxine Waters (D-California), Ranking Member of the Committee, the CHOICE Act will make “radical changes to our financial regulatory framework that would harm consumers and the greater economy.”
Hensarling began his argument at the committee hearing stating he believes the American people remain “stuck in the slowest and weakest economic recovery since at least World War II” and that the economy, including stagnant paychecks and declined savings, are causing the people to lose hope.
He attributed these beliefs to the Dodd-Frank Act that was initiated by President Obama six years ago on July 21, 2010. Hensarling stated the act hurt not only the economy but consumers as well. Additionally, he stated he felt the act made the American financial system less stable.
“It’s time for a new paradigm in banking, and capital markets,” said Hensarling. “It’s time to offer all Americans opportunities to raise their standards of living and achieve financial independence. In a phrase, we need economic growth for all and bank bailouts for none. There is a better way forward and it’s called the Financial CHOICE Act; an acronym standing for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.”
The Financial CHOICE Act, according to Hensarling, will relieve financial institutions from regulations that inhibit growth as well as produce economic burden rather than benefit. He states the act instead will voluntarily meet higher, yet simpler, capital requirements and stops investors from making “risky bets with taxpayer money.” Hensarling believes this act will end taxpayer bailouts.
Hensarling stated that in order to afford this exchange, many larger banks will need to raise significant additional equity capital although most community banks and credit unions will need to raise little if any additional capital. As well banking organizations that maintain certain qualifications may choose to be exempt from the regulations that pre-date Dodd-Frank and those that make a capital election will still be observed and regulated by the banking agencies, but the presumption will be that they are operating safely and soundly.
Hensarling stated that while he believes maintaining a large capital buffer does not guarantee that a bank will never fail, he thinks it should be noted that among all insured depository institutions that entered 2008 with a leverage ratio of at least 10 percent, 98 percent survived the financial crisis and of those that did fail, none were of a sufficient size or scale to present any systemic issues.
Hensarling finished his opening statement stating, “Seven-plus years of Obamanomics and six years of Dodd-Frank have delivered nothing to the American people but stagnant paychecks and diminished savings. Freeing well-capitalized, well-managed financial firms from the chokehold of an overly intrusive, heavily politicized regulatory regime will help create a healthier economy for all struggling Americans.”
Alternatively, Waters’ started her opening statement by stating she felt from the moment Dodd-Frank was passed, she has seen “piecemeal attempts” by her colleagues on the Republican side “aimed at undercutting Wall Street Reform” and putting the desires of “special interests” above those of Americans.
“The legislation we will consider today—the Wrong Choice Act—is the centerpiece of this deregulatory agenda and is the culmination of six years of Republican efforts to gut financial reform,” said Waters. “It recycles every bad idea this Committee has ever generated, adds a few more bad ideas on top, and creates an omnibus of special interest giveaways that invites the next financial crisis.”
Waters stated that she felt hearing was focused on an act that she believes would give banks a “hall pass” from Wall Street Reform if they achieve a 10 percent capital ratio.
She stated that while credible financial reformers have proposed strengthening capital requirements in exchange for some regulatory relief for community banks, she does not believe that the Financial CHOICE Act is that bill and that the act does not contains any of the guardrails of other proposals, such as limits on banks’ derivatives activity. She stated that she believed because the act has no caps on bank mergers, this will mean big banks will only get bigger.
Waters stated, “While the bill claims to end taxpayer bailouts, it would actually put us right back to where we were in 2008, when the largest banks had an implicit taxpayer guarantee.”
Most importantly Waters stated that she felt the bill would make it “nearly impossible” for the Consumer Financial Protection Bureau to protect borrowers from financial abuse. She stated that to her, this does not make good sense and she believes the act would undo the benefits it in her opinion has produced for consumers.
Waters ended her statement saying, “Instead of spending so much time and energy trying to repeal Dodd-Frank, we should be building on its reforms and ensuring that our regulators can implement them effectively. That is the work this Committee should be focused on.”