Now that Republicans control Congress, some are hoping to scale back onerous financial regulations imposed by Democrats in response to the 2008 financial crisis.
Republican Sen. Richard Shelby, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, introduced financial regulatory reform legislation Tuesday that would, among other things, scale back parts of the Dodd-Frank Act.
The legislation is still in its preliminary stages, but Shelby said in a press release that he is hopeful it will “initiate a conversation with all members of the Committee who are interested in reaching a bipartisan agreement to improve access to credit and to reduce the level of risk in our financial system.”
To that end, the discussion draft includes a number of reforms that Republicans have long demanded, but with a limited scope that may be designed to appease potentially reluctant Democrats. (RELATED: Dodd-Frank a Total Failure, Bipartisan Panel Agrees)
One provision, for instance, exempts banks with $10 billion or less in assets from the “Volcker rule” imposed by Dodd-Frank, which prohibits banks from investing customer deposits for their own gain. Proponents of the Volcker rule claimed at the time that such “proprietary trading” contributed to the financial collapse of 2008, but experts on both sides of the aisle are beginning to discount that claim.
“Questioning the wisdom of the Volcker Rule is something that folks on both sides of the aisle have been doing,” J.W. Verret, a Mercatus Center Senior Scholar and former chief economist for House Financial Services Committee, told The Daily Caller News Foundation. “[Federal Reserve] Chair [Janet] Yellen and many others have argued that proprietary trading wasn’t a principal cause of the financial crisis.”
Shelby’s proposal offers a compromise of sorts, allowing small banks to engage in proprietary trading while maintaining the prohibition for large banks whose activities might affect the overall financial system.
Verret told TheDCNF that while he would prefer a full repeal of the Volcker rule, even a partial rollback represents a step in the right direction. (RELATED: Dodd-Frank Crushes Small Banks)
“A number of large banks that weathered the crisis well were able to do so because of a long history of trading profits,” he pointed out, though “it remains to be seen how much small banks will take advantage of the exemption.”
The bill would also alter the process by which banks are designated as “systemically important,” a classification that triggers extra regulations on financial institutions whose collapse could threaten the entire banking sector.
Dodd-Frank automatically applies this designation to all banks with more than $50 billion in total assets, but Shelby proposes giving the Treasury Department’s Financial Stability Oversight Council discretion in cases involving banks with between $50 billion and $500 billion in total assets. (RELATED: Dodd-Frank Makes Future Taxpayer Bailouts More Likely)
“This change does not take away regulators’ ability to designate firms between $50 and $500 billion” as systemically important, Verret noted, but “it will achieve … a vital first step in eliminating some of Dodd-Frank’s knee-jerk designation, based on arbitrary size, without any analysis by the regulators.”
Most of Shelby’s reforms address specific regulations, but he also includes a catch-all provision to give Congress the leeway to other deficiencies in Dodd-Frank as they become apparent.
Section 125 of the discussion draft requires federal financial regulators to perform a comprehensive review of Dodd-Frank regulations to identify outdated or otherwise unnecessary regulatory requirements that can be eliminated.
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