House votes for bipartisan change to Dodd-Frank on bank swaps

A bipartisan tweak to the Dodd-Frank financial reform law passed the House Wednesday, one that would give banks more flexibility to use complex financial instruments known as swaps to hedge risk.

The House passed the Swaps Regulatory Improvement Act, H.R. 992, in a 292-122 vote that saw 70 Democrats join all but three Republicans. Republicans voting against it were Reps. John Duncan (Tenn.), Walter Jones (N.C.), and Thomas Massie (Ky.).

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In reaction to the 2008 financial meltdown, Congress included language in Section 716 of Dodd-Frank that required banks to move commodity, energy and other swaps into a non-bank entity. Banks can still hedge risk directly using interest rate and foreign exchange swaps, but the idea was to remove other risks from banks, many of which were ultimately bailed out by the government.

Since then, however, members of both parties have said banks should have more options for hedging risk. They have also decided that the current requirement forces banks to move swaps to entities that are not regulated by the government.

"Section 716 requires financial institutions to push out almost all of their derivatives business into separate entities," said House Financial Services Committee Chairman Jeb Hensarling (R-Texas). "This not only increases transaction costs, which are ultimately paid by the consumers, it also makes our financial system less secure by forcing swap trading out of regulated institutions."

Hensarling noted that the bipartisan bill was passed by his committee in a 53-6 vote back in May.

Rep. Carolyn Maloney (D-N.Y.), the second-ranking Democrat on that committee, said many people agree the change needs to happen, including the chairman of the Federal Reserve Board and the key House author of the law, former Rep. Barney Frank (D-Mass.).

"Even Federal Reserve Chairman Ben Bernanke opposed Section 716 as written, stating that the way it forces these activities out of insured depository institutions 'would weaken both the financial stability and strong regulation of the derivatives activities,' " she said.

"So Ben Bernanke has said that our bill before us will protect safety and soundness. Barney Frank agrees. Mark Zandi of Moody's agrees, I agree, and I urge my colleagues to agree with us."

However, the mention of Frank on the floor drew a reaction from Frank that was released through the office of House Financial Services ranking member Maxine Waters (D-Calif.), who also opposed the bill.

"Now that the Lincoln amendment [or the swaps rule] is part of the law, it would be a mistake and destabilizing to repeal this provision," Frank said. "I would vote against H.R. 992."

Aside from Waters, Agriculture Committee ranking member Collin Peterson (D-Minn.) also opposed the bill on the floor.

"This bill would effectively gut important financial reforms and put taxpayers potentially on the hook for big banks' risky behavior," Peterson said. "The provision is a modest measure designed to prevent the federal government for bailing out or subsidizing bank activity that is not related to the business of banking."

Peterson also noted that under current law, banks can still perform about 90 percent of the swaps hedges they were able to perform before Dodd-Frank.

"So banks can keep 90 percent in the bank," he said. "But apparently this isn't good enough for some of these big banks, which is why we're here today with H.R. 992."

On Tuesday, the White House said it opposes the bill, but stopped short of threatening to veto it. The White House said regulators are working to implement the law still, and legislation to amend Title VII of the law is "premature and could be disruptive and harmful to the implementation of these reforms."

The White House said regulators should finish that work before anyone determines what changes might be needed.

The House approved another Dodd-Frank tweak on Tuesday: the Retail Investor Protection Act, H.R. 2374. That bill, which the White House did threaten to veto, would delay Department of Labor regulations would would impose new fiduciary requirements on investment companies used by retail investors.

— This story was updated at 2:48 p.m. to add former Rep. Frank's comment.