Rep. Jeb Hensarling (R., Texas), the chairman of the House Financial Services Committee, has introduced new legislation called the Financial CHOICE Act that would repeal and replace the Dodd-Frank Act.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law by President Obama after the financial crisis of 2008 to "promote the financial stability of the United States by improving accountability and transparency in the financial system" and put an end to "too big to fail" banks.
The Financial CHOICE Act, which stands for Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs, would eliminate taxpayer-funded bailouts and relieve financial institutions from regulations.
While supporters of Dodd-Frank blame deregulation for the financial crisis, Hensarling said that financial regulation actually increased in the decade leading up to the financial crisis.
"Regulatory restrictions on financial services grew every year between 1999 and 2008," Hensarling said. "Financial services was, and remains, one of the heaviest regulated industries in the economy."
"The Republicans’ better approach will relieve financial institutions from regulations that create more burden than benefit in exchange for meeting higher, yet simple, capital requirements," he said. "Our reform plan allows banks to opt in to an alternative regime that replaces growth-strangling regulation with reliable accountability. It stops investors from betting with taxpayer money."
"Banks will opt in to the Republican plan’s new regime only if it makes them more competitive—in other words, if it lets them better serve customers at a lower cost," he said.
Hensarling’s plan would end "too big to fail" by replacing Dodd-Frank’s Orderly Liquidation Authority, which allows government bureaucrats to favor some creditors over others, with the Financial Institution Bankruptcy Act, which creates a new subchapter of the bankruptcy code to address large financial institutions that have failed.
Another component of Hensarling’s plan is to ensure that every financial regulation passes a cost-benefit analysis so that stakeholders know how the rule will impact economic growth before it takes effect. The REINS Act, which stands for Regulations from the Executive in Need of Scrutiny, would require that all major financial regulations be approved by Congress before taking effect.
The plan would also toughen penalties on bad actors at financial institutions.
"The Financial CHOICE Act will impose the toughest penalties in history for financial fraud, self-dealing, and deception," Hensarling said.
The plan intends to increase capital formation and entrepreneurship by repealing the Volcker Rule, which prohibits banks from engaging in proprietary trading investments for their own trading accounts.
"Of the roughly 450 financial institutions that failed during or as a result of the crisis, not a single one failed because of proprietary trading," Hensarling says. "In fact, financial institutions which varied their revenue stream were better able to weather the storm, continue lending, and support jobs."
President Obama has called Republican proposals to repeal Dodd-Frank "crazy," and White House Press Secretary Josh Earnest said Hensarling’s plan "doesn’t make any sense."
"Financial industry reform essentially guarantees that taxpayers will not be on the hook for bailing out big banks if their risky bets go south," Earnest said. "But if you tear it down, like House Republicans say that they want to do, that will allow big banks to go back to making risky bets and put taxpayers back on the hook once again for bailing out those banks to prevent a second Great Depression."
Hensarling said that the Financial CHOICE Act is the only plan that prevents bailouts.
"It is the president’s own Dodd Frank that codified into law taxpayer bailouts," Hensarling said. "Again, all you have to do is look into Title I and Title II of Dodd Frank, you will see the ability to designate firms as too big to fail and they are backed up with something called the Orderly Liquidation Authority which is a taxpayer bailout fund which can borrow trillions and trillions of dollars of taxpayer money in order to resolve large Wall Street banks."
"So what we have here to some extent is a bargain between some elements of Washington and some elements of Wall Street and that is if some banks will accept essentially a utility model then Washington will politically allocate a credit and guarantee that they will never fail," he said.
Hensarling met with presumptive Republican nominee Donald Trump on Tuesday to discuss details of the Financial CHOICE Act. Trump has previously said that he wants to "dismantle" Dodd-Frank.
"Like a number of Republicans, I’ve had my disagreements with things Mr. Trump has said and done but this is clearly one area that we agree on," Hensarling said. "I had an opportunity to brief him on the plan and I think that he was favorably disposed. I didn’t ask him to endorse it."
"I think there’s a lot of common ground there and should he become president I think there’s a lot we can work on together in promoting economic growth in our capital markets," he said.