While the Financial Choice Act may be the most likely effort to get through the House, it comes with risks…
The political headlines this month have been dominated by government shutdowns, health care reform, and tax overhauls, but a potentially bigger bill is working its way through Congress right now. The so-called “Financial Choice Act”, a massive 593 page bill that would repeal the Dodd-Frank act and grant newfound freedoms to the banking industry, arguably stands a better chance of passing than the major reforms being tossed around on the front page.
So what is the Financial Choice Act? First, it’s being spearheaded by Jeb Hensarling (R-TX) and is already finding strong support both in the House and the Senate. Republicans are also confident that they will be able to secure at least some Democratic support. The Senate, so far, is shaping up to be a tougher fight but out of the major reforms currently proposed, it appears to be the most promising.
The act will gut the Consumer Finance Protection Bureau, which was set up to protect consumers from large predatory banks. So far, the Bureau has succeeded in securing millions of dollars from financial firms which have engaged in deceptive, and sometimes outright nefarious practices. The Financial Choice act will bring the bureau under closer control of Congress and the White House, and most importantly will eliminate its ability to set rules.
Perhaps the most worrisome part of the Act, however, will be efforts to repeal the so-called Volcker Rule, which prohibits commercial banks from getting involved in certain types of risky investments. The idea behind these rules is to protect consumers and their savings from unnecessary exposure to various risks. If the rule is repealed, it will make it even easier for banks to take the sorts of risky gambles that led to the 2007-08 financial crisis.
Further stress test and capital requirements will also be eased. Banks that don’t meet certain thresholds for capital requirements (meaning smaller banks) will be exempted from many regulations. Meanwhile, government regulatory bodies would be restrained from introducing new regulations.
Despite promises that markets would regulate themselves, bankers have proven prone to taking on unreasonable risks in the pursuit of profits. Often, their pay and bonuses are determined by short-term performance, meaning short-term risks also carry high rewards. Many banks also believe that they will receive a bailout if they are pushed to the verge of collapse. This has created an environment that is increasingly risky for main street Americans and tax payers while increasingly profitable for Wall Street Banks.
