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House Passes Dodd-Frank Rewrite: Will The Senate Follow Suit?

ArmchairPolitiicianDoddFrank, June 11, 2017, by Brad Peery, WWW.ArmchairPolitician.US, ArmchairPolitician.US@gmail.com

Dodd-Frank was passed in 2010 as a financial reform prescription to avoid another economic collapse, such as occurred in the housing crash in 2008-2009. The regulations were target at the large banks, but have had a profound negative impact on the medium size banks. President Trump regulations such as Dodd-Frank are negatively impacting the U.S. Economy.

A threshold of $50 billion in size was the cutoff established to separate the banks that would come under the act from those that would not. The largest bank, J.P. Morgan Chase has $2.5 trillion in assets, and the tenth, Capital One, has $300 billion in assets. Banks with $50 billion in assets certainly do not pose a risk to the U.S. economy. There are 37 banks above this threshold. In revising the bill, the threshold might be set between $250 billion and $500 billion or it might depend on the riskiness of the bank. The larger banks use depositor assets as capital to reach a 5% threshold of capital required for making a loan. Changes might be to make loans dependent on actual capital in the bank, instead of deposits by customers

Although the Senate will certainly change the House Financial CHOICE Act, the changes in the House bill are numerous.

There is a Consumer Protection Bureau that will be restructured.

Stress tests on the banks are designed to make sure they don’t undertake actions that are too risky. The Fed-administered tests may have improved banks’ risk management and transparency. However, the testing procedures have created uncertainty. These will be revised, and might be applied at as long as two-year intervals.

An Orderly Liquidation Authority, designed to wind-down a failing bank, has been eliminated.

Banks with assets above $50 billion, and below as much as a 10 times higher threshold, will no longer need to comply with the Act.

Mortgage lending by small banks is an issue. Increased lending will be promoted by minimizing a rule about qualified mortgages. The rule increases costs of lending to higher risk borrowers and often precludes banks from holding mortgages on their books. Modifying the rules may allow local banks to increase lending.

The Volcker Rule limits proprietary trading by banks, and attempts to reduce speculation. Defining differences between speculation and market making have been difficult. The Volcker Rule has been eliminated.

A very controversial element has been the fiduciary rule, which mandates that financial advice must be in the client’s best interest. It’s set to be implemented today but the Department of Labor has said it won’t enforce the rule until January 1, 2018.

The Financial CHOICE Act could face difficulties in the Senate, and because of Democratic intransigence, might be broken into smaller bills to allow the Republicans to use the reconciliation process to avoid a Senate filibuster.

Armchair Politician Opinion:
Dodd-Frank’s objectives of reducing the risks being undertaken by large banks is a good objective that has forced large banks to reexamine the risks they undertake. However, it has been heavy-handed, increasing substantially the costs of complying with the Act, particularly for small banks. It’s revision is sorely needed.

The Financial CHOICE Act’s outcome is uncertain, because of the question of when an if the Senate might act. It is being hailed as a Trump victory because of it passing the House. Whether it becomes a true victory remains to be seen.

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