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03/07/2017 0:00 - Capital Market
NICOLAS FERRER
Financial Choice Act: burden relief for the financial system

About a decade after the beginning of one of the most vicious crisis in the history of finance in the USA, the debate on how to regulate banks and financial services has been torn back open, with the repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the line.

About a decade after the beginning of one of the most vicious crisis in the history of finance in the USA, the debate on how to regulate banks and financial services has been torn back open, with the repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the line.

In July 2010, over a year after the first proposals for comprehensive reform on financial regulation in the US had been filed, the Executive Branch of the US government approved the Dodd-Frank Act. This piece of legislation would establish a new regulatory framework that included new agencies and higher capital requirements for banks and financial companies, with special attention being paid to those that traded asset-backed securities and exotic derivatives such as credit default swaps.

This way, legislators tried to limit the systemic risk that arises from the operations of these entities by raising capital requirements and calculation methods. At the same time, the act established orderly liquidation procedures for systemically important financial institutions (those deemed “too big to fail”), looking to minimize the cost of their possible bankruptcies which could arise from bailouts.

The law has been staunchly opposed by most of the Republican Party, including the current administration of the Executive Branch of the US government. The argument against the Dodd-Frank act is that because of it, banks and financial institutions have been forced to bear a costly bureaucratic burden that raises the cost of credit and limits economic growth without removing any of the inherent risks present in the financial system. Looking to do away with such encumbrance, the House Financial Services Committee put forward a bill called the Financial Choice Act that was passed by the House of Representatives on June 8 2017.

Among the main proposed measures found in the bill we can mention:

•To repeal Title II of the Dodd-Frank Act and its Orderly Liquidation Authority. This title determined that if it were found that a systemically important financial institution was in risk of default (meaning nearing declaration of bankruptcy), the Federal Deposit Insurance Corporation (FDIC) would seize control of its assets in order to manage a liquidation process that ensures that costs are affronted by shareholders and creditors. The title also determines that those responsible of the company’s mismanagement are to be held accountable of the losses.

•Restrict the use of the Federal Reserve’s discount window to a “lender of last resort” function, denying previously existing access from financial market utilities (which manage and operate multilateral clearing and settlement systems) considered systemically important by the Financial Stability Oversight Council (FSOC).

•Increase penalties and fines for fraud and manipulation cases, transferring income from fines to the US Treasury for deficit reduction.

•Make all regulatory agencies subject to the REINS (Regulations from the Executive in Need of Scrutiny) Act, under which they will require approval from the legislative branch in case proposed regulatory measures are expected to have significant economic impact. At the same time, executive agencies (including the Federal Reserve in its regulatory function) will be required to perform exhaustive economic analysis of their activities.

•Offer banking institutions a choice between holding a larger leverage ratio or be subject to more thorough regulatory scrutiny such as Basel III liquidity and capital ratios.

•Incorporate bills that promote community financial institutions and financing for small and medium enterprises.

•Create the Consumer Law Enforcement Agency in order to replace the Consumer Financial Protection Bureau, restructuring the agency in charge of consumer protection and the development of competitive market conditions in order to task it with an enforcing rather than supervisory role.

The proposal has received criticism from diverse groups that consider it dangerous to relief bank from regulatory supervision in exchange of simply larger capital holdings. Other arguments against the bill are that it should limit the capacity of the Securities Exchange Commission (SEC) to apply penalties through administrative processes without the requirement of a court of law2 and that it will prevent minority shareholders from filing motions in annual company meetings3.

1. For more information, visit: https://financialservices.house.gov/choice/

2. See http://www.reuters.com/article/us-otc-sec-idUSKBN1852CY

3. See https://www.ft.com/content/1f55e9a6-569d-11e7-9fed-c19e2700005f?mhq5j=e2.

 

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