CHOICE Act takes consumer cops off the Wall Street beat
© Greg Nash

At a time when too many hard-working American families are still recovering from the devastating impact of the 2008 financial crash, deregulating Wall Street’s biggest firms again makes no sense. Yet the Financial CHOICE Act threatens to do exactly that.

It would allow the biggest Wall Street banks to opt-out of significant financial protection rules, while those banks that remain in the regulatory system would be blessed with watered down versions of once-tough protections, like living wills and stress tests. Perhaps most worryingly, the CHOICE Act would cripple two of the most important post-crash reforms: the Financial Stability and Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB). 


In exchange for maintaining a 10-percent leverage ratio, only modestly higher than what many banks today maintain, the CHOICE Act would allow Wall Street banks to opt-out of some of the most important post-crash financial protection rules. This is far too cheap a toll to allow banks onto this deregulatory off-ramp.  


Remember that the capital shortfall of the biggest banks in 2008-2009 was about 20 percent, and that was after the government and taxpayers de facto nationalized the financial system with massive bailouts. Thus, even if banks were required to maintain 10-percent capital, they would still be 100-percent short of what they would need to survive a crash similar to 2008. 

The CHOICE Act would also slash in half the number of stress tests for most banks and require regulators to publicly disclose exactly how the tests would be evaluated, effectively giving the banks a road map to passing the test. Dodd-Frank requires the Federal Reserve to conduct annual “stress tests” to gauge the health of large U.S. banks. The Fed's stress tests are one of the most effective tools regulators have to prevent a future financial crisis.

Even Gary Cohn, chair of the National Economic Council, acknowledged this when he was the president of Goldman Sachs: “We’re subject to enormously robust stress tests here in the United States, and I give the Fed enormous credit for what they’ve done in stress testing the major banks here in the United States.” 

Resolution plans, called “living wills,” are an essential early defense to protect us from the catastrophic failure of a large banks, but after years of effort, regulators still find that too many banks continue to pose too great a threat to our financial stability. The CHOICE Act significantly weakens the “living will” process, cutting the number of submissions in half and requiring regulators to tell the banks how the wills will be graded so they can game the system and ensure they pass.

The Financial Stability Oversight Council (FSOC) was created to be an early warning system to help detect and prevent future financial, economic and human calamities like those of 2008-2009. Congress created the FSOC with widespread bipartisan support, as well as support from the banking industry, in response to the catastrophic failure of unregulated nonbank systemic threats like American Insurance Group (AIG). AIG’s failure happened because no one regulator was responsible for overseeing the systemic risk posed by the firm. 

To stop future crises, we need a strong and effective FSOC. But the CHOICE Act would cripple the FSOC’s operations and make its effective oversight of nonbanks impossible. It would retroactively repeal the FSOC’s designations of certain nonbank financial firms as systemically important and prohibit the FSOC from making any such designations in the future.

It would strip the FSOC of its ability to prohibit or otherwise limit Wall Street gigantic firms from engaging in certain risky activities, and tie up the council’s budget and operations with congressional interference. The CHOICE Act’s micromanagement of the FSOC even dictates how the council should hold its internal votes.

The FSOC needs flexibility, discretion and independence to identify new and emerging risks and keep current with market developments and financial innovations. The CHOICE Act would add unnecessary layers of bureaucracy for the FSOC and undermine its mission, putting taxpayers at risk again of having to bailout Wall Street.

The CFPB has proven to be the most effective consumer protection agency ever created. It has returned almost $12 billion to more than 29 million Americans who have been ripped off by financial firms. No one knows where the next crash will be incubated, but it will almost certainly have a predatory and fraudulent basis where financial consumers are systematically ripped off, which will spread risk through the financial system. 

The best way to stop this is with a strong CFPB, possessing broad authority to stop predatory and fraudulent conduct. Eliminating it, or crippling it by making it a commission (a euphemism for partisan paralysis) or subjecting it to the annual congressional appropriations process (where it can be underfunded by Wall Street’s allies to render it ineffective) would take the consumer cops off the Wall Street beat. 

The most recent job numbers were notable for several reasons, not the least of which is that unemployment is at a 10-year low. Or, put another way, employment levels have returned to where they were before the 2008 crisis. Similarly, bank lending and profits have rebounded as well.

As the country continues to recover from the 2008 crash, one has to wonder why we would risk the progress we have made by taking a major step backward and undoing the financial protection rules that have enabled us to get this far. 

Dennis M. Kelleher is president and CEO of Better Markets, a Washington-based independent, nonpartisan, nonprofit organization that promotes the public interest in financial reform, financial markets and the economy. Kelleher has held several senior staff positions in the United States Senate, most recently as the chief counsel and senior leadership advisor to the chairman of the Senate Democratic Policy Committee.

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