A Better Way than Dodd-Frank

By now everyone who works in the financial industry and does not live under a rock down by the river is aware of Dodd-Frank.  This was originally proposed by President Obama and heralded by proponents as the greatest expansion of governmental control of banking and financial markets since the Great Depression, the act was passed in 2010 and was supposed to avert any other financial crisis.  As an aside here, how is more governmental control good, when you have a government that is $20 trillion in debt?

But back to the issue at hand.  Dodd-Frank imposed more government regulation on nearly all aspects of financial services.  It also created the Consumer Financial Protection Bureau. This agency has been described by some as Orwellian.  House Financial Services Chairman Jeb Hensarling stated this week, “We know the best consumer protections are competitive, transparent, and innovative markets, vigorously policed for fraud.” 

In a speech to the New York Economic Club, Hensarling unveiled a new proposal that will overhaul and replace most of the Dodd-Frank Act with a more market based regulatory scheme.  The proposed plan is touted as being much simpler than what has been created.  The focus on the plan is to help grow the economy.  Hensarling stated, “We need economic growth for all and bank bailouts for none.”

Hensarling counters the theory that deregulation created the financial crisis.  His statements point to regulation by the Washington elite as the root cause, citing the example of Fannie Mae and Freddie Mac requiring lenders to loan money to people who could not afford the house they were buying.  Hensarling quotes economist Friedrich Hayek’s book Fatal Conceit, describing the 2,300 page law as an example of “Washington’s elite deciding they’re smarter and can somehow manage the economy better than the rest of us.” 

There has been discussion in the credit union industry to have the CFPB to treat all credit unions as exempt.  Hensarling’s proposal uses a regulatory off-ramp.  Banks that hold a high level of capital and maintain a robust balance, sheet would be able to escape much of Dodd-Frank.  The representative believes that the requirement will not have as much of an impact on smaller, more local lending institutions.  Larger banks may have to raise more capital. 

The plan encourages industry discipline.  Hensarling said it is “having your own money at risk as opposed to having a taxpayer backstop which provides the privatization of profits and socialization of losses.”  The removal of the bailouts and adding higher capital requirements may see more of the downfall of institutions deemed “too big to fail.”  The plan would create a new avenue of controlled bankruptcy for a troubled institution with assets over $50 billion.  Larger banks would likely become smaller. Any credit obtained from the government would be priced according to the risk they pose without any government guarantee. 

The plan to break up large money-centered banks, thus creating more competition will be good for the consumer in giving more choices.  The work to help expand the field of membership in credit unions will assist in expanding the menu of options.  Leaving more financial options in the free market will go against a trend to turn the financial industry into the equivalent of a utility.  This would prevent either side from politically allocating credit. 

Increased regulation has hurt smaller credit unions and banks.  The pleas of these institutions has fallen on deaf ears of those who impose the new regulations who are content to allow a slow death of the small financial institution. 

This process is worth watching.  It would be nearly impossible for this to pass in the current political environment but it could serve an important part of the future agenda.