(Photo by Mark Wilson/Getty Images)
The U.S. House of Representatives on Thursday passed the Financial CHOICE Act, a Republican-led financial reform effort aimed at rolling back the 2010 Dodd Frank Act, enacted under President Barack Obama.
Dodd Frank was a sweeping re-write of U.S. financial laws in the wake of the financial crisis, which altered everything from the trading of stocks and bonds to the way in which large banks are regulated. President Trump, however, believes regulations are slowing the U.S. economy and has proposed drastic cuts as a centerpiece of his agenda.
The Act has seven principals:
1. Taxpayer bailouts of financial institutions must end and no company can remain too big to fail.
2. Both Wall St. & Washington must be accountable
3. Si mplicity must replace complexity
4. Economic growth must be revitalized
5. Every American must be able to achieve financial independence
6. Consumers must be protected
7. Systemic risk must be managed via profit & loss
Senator Elizabeth Warren, a Democrat from Massachusetts, smiles before the start of a Senate Banking Committee hearing with Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), not pictured, in Washington, D.C., U.S., on Thursday, April 7, 2016. Testimony from Cordray today may shed light on the status of several regulations that could curtail revenue from payday loans, prepaid cards and other financial products. At a March 16 hearing, Cordray hinted that a rule to limit prepaid cards won’t be finished until June. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Elizabeth Warren
These rollbacks will have real policy implications. Here are the reform items Wall Street is watching as the House-approved bill moves to the Senate.
The Act proposes to restructure the Consumer Financial Protection Bureau, an agency that monitors financial products from loans to high-fee investment products.
In banking, the CHOICE Act take aim at Title II of Dodd Frank, which created an Orderly Liquidation Authority, designed to wind-down a failing bank. It eliminates the Financial Stability Oversight Council.
Stress tests for America’s big banks, another Dodd Frank invention, are also contentious. The CHOICE Act proposes major changes.
Reform supporters think the Fed-administered tests have improved banks’ risk management and broader transparency. But CEOs have been caught off guard on how they are tested.
The CHOICE Act will seek to dramatically reign in stress tests and even potentially make them bi-annual.
The Act is seen by exp erts as an aggressive first bid at deregulation by Trump, which cannot pass the Senate. It was passed in the House of Representatives on party lines. However, there may be pockets of consensus.
One of them is regulatory relief for mid-sized banks with assets of $50 billion or more. Presently, these banks are treated as systemically important with stricter regulations that also increase costs.
In mortgages, the CHOICE Act will aim to allow smaller banks to increase lending 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.
Jin Lee/Bloomberg News
The CHOICE Act repeals the Volcker Rule, which limits proprietary trading and speculation by banks. Defining differences between speculation and market making have been hard, leading to repeal proposals. But, financial soundness advocates warn against allowing mega banks to re-load on risk.
The Department of Labor’s so-called ‘fiduciary rule,’ aimed at mandating clients’ best interest in financial advice could also be a flash-point. It’s set to be implemented today but the DOL has said it won’t enforce the rule until January 1, 2018.
WASHINGTON, DC – MAY 23: Sen. Bernie Sanders (I-VT) (R), is flanked by Senate Minority Leader Charles Schumer (D-NY) while speaking to the media about President Trump’s Proposed FY 2018 budget, on Capitol Hill on May 23, 2017 in Washington, DC. (Photo by Mark Wilson/Getty Images)
The omnibus bill is headed to the Senate, where key democrats like Chuck Schumer and Elizabeth Warren will try to alter the legislation.
There’s talk of breaking up the CHOICE Act into pieces that can passed via reconciliation.
WASHINGTON, DC – APRIL 4: US President Barack Obama meets with NATO Secretary General Jens Stoltenberg in the Oval Office at the White House, on April 4, 2016 in Washington, DC. (Photo by Mark Wilson/Getty Images)
New priorities on enforcement may change the tone on Wall St., freeing banks to make more money.
On Friday, bank stocks like JPMorgan, BofA and Goldman Sachs were top performers as the Dow Jones Industrial Average rallied.