Dodd-Frank replacement, Heritage Foundation ideas on tap for discussion

By Carrie Salls | Jun 22, 2016

WASHINGTON – House Financial Services Committee chairman Jeb Hensarling (R-TX) will discuss the Republican plan to replace the Dodd-Frank Act at a Heritage Foundation event on Thursday that will also include a discussion led by the authors of foundation publication “The Case Against Dodd-Frank.”

A media alert from Hensarling’s office indicated that he will discuss the Financial CHOICE Act as part of his keynote speech at the Heritage Foundation event. Financial CHOICE stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs. 

The Financial CHOICE Act is designed to end taxpayer-funded bailouts of large financial institutions, relieve banks that elect to be strongly capitalized from “growth-strangling regulation” that slows the economy, and harms consumers and imposes tougher penalties on those who commit fraud as well as greater accountability on Washington regulators.

The foundation said its publication, “The Case Against Dodd–Frank: How the ‘Consumer Protection’ Law Endangers Americans,” grew from a shared concern among the contributing authors about the direction that financial regulation in this country has taken since the 2007 to 2009 financial crisis as a result of the regulations imposed under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

The foundation said the contributors to this volume have used their knowledge of the financial sectors covered by Dodd-Frank to explain problems the act creates, and to propose solutions to them.

Thaya Brook Knight, the associate director of financial regulation studies for the Cato Institute, co-wrote a chapter of the book with colleague Mark Calabria, Cato Institute director of financial regulation studies, on executive compensation and credit rating agencies.

“A hallmark of Dodd-Frank is that it’s sort of a grab bag of people’s wish lists,” Knight told the SE Texas Record. 

She said the law operates under the “idea that the government needs to be a super director.”

Knight said some of the regulations of credit rating agencies “absolutely play into the crisis,” while executive compensations do not. She said institutional investors can only buy investment-grade bonds, but that “the issuers were the ones paying for the ratings” that were the basis for many investment decisions.

“Dodd-Frank regulations make it more difficult for a new company to come in,” Knight said, adding that credit agencies should be “part of the mix” in considering which investments to make, “instead of the gold standard.”

Knight said the emotional response to executive compensation in connection with the financial crisis is understandable, but that regulations designed to address this issue “haven’t always worked.” For example, Knight cited a Securities and Exchange Commission regulation that requires companies to compare executive compensation to that of the average worker at the same company.

“What is the average worker?” Knight asked. “That’s just an invitation to [use] the system” by hiring lower paid employees as contractors.

Specifically, the Financial CHOICE Act will create a new subchapter of the Bankruptcy Code tailored to specifically address the failure of large, complex institutions, and banks that choose to be strongly capitalized will be eligible for relief from Washington regulations “that create more burden than benefit,” Hensarling said in a news release. As a result, the banks will be required to raise additional equity capital under the act, with most community banks needing to raise little-to-no additional capital.

The Financial CHOICE Act also includes more than two dozen measures to provide additional regulatory relief for community banks and credit unions.

In a speech in early June, Hensarling said Dodd-Frank caused an “inventory of harm” to consumers and the economy. He called the law “a grave mistake” that “has failed.”

“Pro-growth reforms in our plan will provide much-needed relief to community financial institutions that are being crushed by Washington’s one-size-fits-all regulatory approach,” Hensarling said.

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