Hensarling's wrecking ball to financial regulation
© Greg Nash

Jeb HensarlingThomas (Jeb) Jeb HensarlingHas Congress lost the ability or the will to pass a unanimous bipartisan small business bill? Maxine Waters is the Wall Street sheriff the people deserve Ex-GOP congressman heads to investment bank MORE, Chairman of the House Financial Services Committee, touts his Financial CHOICE Act as legislation that would hold Wall Street accountable even as it dismantled the financial reforms of the Dodd-Frank Act. 

That’s far from accurate. Not only would the Financial CHOICE Act demolish the new regulatory framework that builds on the lessons of the financial crisis, but it contains so many unprecedented gifts to the financial industry that it would make financial regulation even weaker than it was before the crisis.

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Under Hensarling’s control, the House Financial Services Committee has pushed through numerous bills backed by big banks and predatory lenders that would eliminate the power to enforce rules over Wall Street. His new plan looks like more of the same – and in fact it goes further. For example, the bill would prohibit any significant new financial regulation from taking effect unless both Houses of Congress gave their approval within 70 days – an unprecedented requirement that would make Wall Street oversight by administrative agencies subject to the same paralysis we see in Congress.

Hensarling’s plan also empowers Wall Street lawyers to mount still more challenges to regulatory action, by eviscerating longstanding Supreme Court precedents requiring courts to defer to subject-matter experts in regulatory agencies when deciding anti-regulation lawsuits. 

In addition, it repeals numerous sections of the Dodd-Frank Act that limit the risks created by “too big to fail” financial institutions. The plan would specifically strip regulators of their power to take control of a failing megabank, repeal the Volcker Rule ban on banks making proprietary gambles with depositors’ money, and eliminate rules that ban excessive short-term bonus pay and require Wall Street traders to return bonuses acquired by fraudulent or irresponsible activity. And it requires the Federal Reserve to share the details of its risk models with banks before actually testing their risks – which is akin to showing a test to students before they take it.

Chairman Hensarling also wants to eliminate regulators’ power to impose additional risk controls on large non-bank financial institutions like AIG – the recipient of the largest taxpayer bailout in US history.

His bill takes direct aim at the Consumer Financial Protection Bureau, which has returned over $11 billion to more than 25 million Americans scammed by their financial companies. Hensarling starts by attacking the Bureau’s funding; his proposal goes on to greatly pare back its power to stop or punish abusive anti-consumer practices, and to eliminate its examination and enforcement authority over more than half the banks it currently supervises. On top of everything else it would do to the Consumer Bureau, the Hensarling plan would greatly increase the likelihood of ineffectual gridlock by turning the CFPB from a director-led agency into a five-member commission.

If that’s not enough, the Hensarling plan also incorporates over fifty deregulatory bills supported by Wall Street lobbyists. These include measures that would block new rules protecting retirement investors from exploitation by brokers (H.R. 1090), undermine regulators capacity to require banks to address significant risks found in bank examinations (HR 1941), and make regulators roll back consumer and risk protections at numerous banks (H.R. 2896).

Supporters of the plan seem to suggest that these massive and in many cases unprecedented reductions in regulatory authority are counterbalanced by other provisions in the bill, such as new incentives for banks to meet “high but simple capital requirements” as well as new “enhanced penalties for financial fraud.” But a closer look shows that these new provisions are just disguised deregulation.

The plan specifies that if banks achieved a relatively weak 10 percent leverage capital level, they would be exempted from a broad range of safety and soundness requirements. Big banks are currently at 8 to 9 percent leverage capital, meaning that this requirement would be easy to satisfy and do little to make banks safer.

By virtue of meeting this modestly higher capital requirement, banks would be exempted from many rules involving issues that leverage capital alone – especially at these levels – cannot address. These include requirements to maintain sufficient liquid cash on hand to pay upcoming liabilities, requirements to provide against specific asset risks, limits on bank size and concentration, limits on paying out capital to shareholders, and more. 

Higher bank capital standards would certainly be a good thing. But granting a blanket exemption from such a broad range of risk controls in return for raising a small amount of additional capital would make big banks much more dangerous than they are today. 

A closer look at the enhanced fraud penalties included in the legislation likewise shows that they are unlikely to make much if any difference. That’s because other provisions in the bill would make it far harder for the government to pursue fraud cases against Wall Street wrongdoers. While the plan would increase the maximum penalty the Securities and Exchange Commission (SEC) can levy for administrative violations, for example, it also contains a half a dozen provisions that would undermine the SEC’s ability to successfully mount such a case. So even though penalties could be higher if a case succeeded, the bill would make success even rarer than it already is. 

Marcus Stanley is Policy Director of Americans for Financial Reform