Jeb Hensarling Speaks at Heritage on the Financial CHOICE Act
Heritage Foundation
The Case Against Dodd-Frank:
How the ”Consumer Protection” Law Endangers Americans
Thursday, June 23, 2016
Key Topics & Takeaways
- Hensarling on Dodd-Frank: Hensarling insisted that the Dodd-Frank Act gives an “undeniable advantage” to large firms that can afford to comply with the many regulations, and that while Democrats wanted to end “too big to fail,” they have in fact created “too small to succeed.”
- The Financial CHOICE Act: Hensarling touted his coming proposal, the Financial CHOICE Act, explaining that it would provide “economic growth for all” through transparency, effective and innovative markets. He commented that it would protect consumers while ending taxpayer bailouts by addressing systemic risk through market discipline.
Speakers
- Rep. Jeb Hensarling (R-Texas), Chairman, House Financial Services Committee
- Diane Katz, Heritage Foundation
- Paul Kupiec, American Enterprise Institute
- Thaya Brook Knight, Cato Institute
- David Burton, Heritage Foundation
- Norbert Michel, Heritage Foundation
Rep. Jeb Hensarling (R-Texas), Chairman, House Financial Services Committee
In his keynote address, Hensarling was adamantly critical of the Dodd-Frank Act, calling it “Orwellian” that Washington is hurting consumers and calling it consumer protection, and providing subsidies to Wall Street firms while calling it Wall Street reform. He stated that Democrats “think they have the moral authority” to harm Main Street by going after Wall Street, and called Dodd-Frank “freedom-crushing.”
Hensarling insisted that the law gives an “undeniable advantage” to large firms that can afford to comply with the many regulations, and that while Democrats wanted to end “too big to fail” (TBTF) they have in fact created “too small to succeed.” He then continued to criticize the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC) for their lack of transparency and accountability. He said the vast powers of the FSOC allow it to “exert ultimate financial control” of large institutions, and amount to a “functional occupation of our capital markets.”
Hensarling then turned to his coming proposal, the Financial CHOICE Act, explaining that it would provide “economic growth for all” through transparency, effective and innovative markets. He commented that it would protect consumers while ending taxpayer bailouts by addressing systemic risk through market discipline. He stressed that it would provide an “equity-funded opt-out” from Dodd Frank by allowing financial institutions to accept simpler but higher capital requirements in place of complex regulations.
One of the most important aspects of the Financial CHOICE Act, Hensarling continued, is that it would put failing institutions through bankruptcy rather than allowing for bailouts. He defended the bankruptcy process for allowing stakeholders more certainty and incorporating due process, as opposed to Title II of Dodd-Frank’s Orderly Liquidation Authority (OLA).
In addition, Hensarling highlighted that his proposal will include rigorous economic analysis requirements for all regulators, subject them all to the congressional budget process as a way to ensure basic accountability, and require that all major regulations be approved by Congress before implementation. He also lauded provisions that would bolster capital formation, such as the repeal of the Volcker Rule, the modernization of business development company regulation, and relief for community financial institutions.
Panel Discussion
Diane Katz, Heritage Foundation
Katz claimed that rather than ending TBTF, Dodd-Frank empowers the government agencies that failed during the financial crisis. She lamented that Dodd-Frank extends the government’s oversight authority to financial institutions other than banks, such as insurance companies. She also stated she does not believe the government should establish the tradeoffs between regulation and utilizing economies of scale within the banking industry.
Turning to the SEC disclosure rules, Katz argued that not only is disclosure costly, but the rules are trying to drive different types of corporate behavior and the agency is not wary of the potential for unintended consequences.
Paul Kupiec, American Enterprise Institute
Kupiec criticized Dodd-Frank for not taking the trade-off between financial stability and growth and innovation into account, and for trying to prevent a crisis using massive regulation. He denounced Title II of Dodd-Frank for its complexity and for propping up big banks by allowing them to remain open no matter how big of a loss they take, and argued that Title II leads to the potential for nationalization of the banking industry in the case of another financial crisis. He also said that no one knows how the system is going to be used, so if the plan were to go wrong during a crisis, the system would be where it was before Title II existed. Additionally, Kupiec alluded to the importance of economies of scale in financial services, as he stated that no one has studied what the optimal size of banks should be and therefore the government should not be determining appropriate sizes.
Thaya Brook Knight, Cato Institute
Knight argued that a main theme of Dodd-Frank was prioritizing safety over growth. She stated that lawmakers need to make sure they are looking at both sides of the issue. On Securities and Exchange Commission (SEC) required disclosures, Knight stated that investors are interested in disclosure rules because of divestment, but this may lead to a hijack of the disclosure process, which is dangerous. Additionally, she said that because of disclosure rules, many companies pull out of countries that need industry and investment because they do not want to risk the consequences of not complying with the rules.
David Burton, Heritage Foundation
Burton opined that “Too Big to Fail” (TBTF) increases financial instability because losses are privatized and gains are socialized. Additionally, he argued that the SEC does not have the competency to set disclosure requirements since they have nothing to do with the SEC mission. He discussed that as more and more disclosures are required, the disclosure process becomes counterproductive, and that most investors do not actually care about disclosure. He argued the only reason disclosures are so popular is because there is a large and profitable lobbying and consulting industry built around them. Burton stated that he believes the Financial CHOICE Act will address the disclosure requirements since there is a statement about limiting nonmaterial disclosures in the summary document.
Norbert Michel, Heritage Foundation
Michel commented that under Title II, the OLA subsidiary will be held up, not the holding company. Additionally, he agreed with Katz’ statement that it is not the role of the government to establish the optimal bank size.
Questions
Kupiec and Michel both responded to a question on how the Financial CHOICE Act will impact Title I of Dodd-Frank and the FSOC. Kupiec said that the proposal will get rid of the FSOC’s ability to designate systemically important firms and will eliminate all current designations. He also stated that the FSOC will return to its pre-Dodd-Frank responsibilities of informing the executive branch and sharing information, rather than having independent powers. Michel responded similarly, as he said the Financial CHOICE Act will eliminate the two biggest parts of Title I, the FSOC’s ability to designate firms and the Office of Financial Research.
In response to a question on the banks’ opinions on Title II and the Financial CHOICE Act, Katz stated that the large banks’ opinions are not yet known because the politics around the proposal are not settled enough for them to say anything useful and there should be more vocal opinions after the election. Kupiec also claimed that most large banks have been vocal about their support of Title II and Total Loss Absorbing Capital (TLAC), whereas Michel said community banks and smaller banks should support the Financial CHOICE Act and should never have been put under Basel regulations the same way the large banks were.
Responding to a question on higher capital requirements, Kupiec argued that higher capital requirements and rollbacks on regulations need to be enforced concurrently, as the banks would not trust regulators enough for it to be successfully implemented one policy at a time. Additionally, he stated the government’s reluctance to let banks fail is harmful because it lets institutions take risks when they should not and prevents natural entry and exit into the financial system. Knight responded by opining that banks should be able to set their capital levels themselves because only they know what levels of capital best suit their needs.
For more information on this event, please click here.
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Heritage Foundation
The Case Against Dodd-Frank:
How the ”Consumer Protection” Law Endangers Americans
Thursday, June 23, 2016
Key Topics & Takeaways
- Hensarling on Dodd-Frank: Hensarling insisted that the Dodd-Frank Act gives an “undeniable advantage” to large firms that can afford to comply with the many regulations, and that while Democrats wanted to end “too big to fail,” they have in fact created “too small to succeed.”
- The Financial CHOICE Act: Hensarling touted his coming proposal, the Financial CHOICE Act, explaining that it would provide “economic growth for all” through transparency, effective and innovative markets. He commented that it would protect consumers while ending taxpayer bailouts by addressing systemic risk through market discipline.
Speakers
- Rep. Jeb Hensarling (R-Texas), Chairman, House Financial Services Committee
- Diane Katz, Heritage Foundation
- Paul Kupiec, American Enterprise Institute
- Thaya Brook Knight, Cato Institute
- David Burton, Heritage Foundation
- Norbert Michel, Heritage Foundation
Rep. Jeb Hensarling (R-Texas), Chairman, House Financial Services Committee
In his keynote address, Hensarling was adamantly critical of the Dodd-Frank Act, calling it “Orwellian” that Washington is hurting consumers and calling it consumer protection, and providing subsidies to Wall Street firms while calling it Wall Street reform. He stated that Democrats “think they have the moral authority” to harm Main Street by going after Wall Street, and called Dodd-Frank “freedom-crushing.”
Hensarling insisted that the law gives an “undeniable advantage” to large firms that can afford to comply with the many regulations, and that while Democrats wanted to end “too big to fail” (TBTF) they have in fact created “too small to succeed.” He then continued to criticize the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC) for their lack of transparency and accountability. He said the vast powers of the FSOC allow it to “exert ultimate financial control” of large institutions, and amount to a “functional occupation of our capital markets.”
Hensarling then turned to his coming proposal, the Financial CHOICE Act, explaining that it would provide “economic growth for all” through transparency, effective and innovative markets. He commented that it would protect consumers while ending taxpayer bailouts by addressing systemic risk through market discipline. He stressed that it would provide an “equity-funded opt-out” from Dodd Frank by allowing financial institutions to accept simpler but higher capital requirements in place of complex regulations.
One of the most important aspects of the Financial CHOICE Act, Hensarling continued, is that it would put failing institutions through bankruptcy rather than allowing for bailouts. He defended the bankruptcy process for allowing stakeholders more certainty and incorporating due process, as opposed to Title II of Dodd-Frank’s Orderly Liquidation Authority (OLA).
In addition, Hensarling highlighted that his proposal will include rigorous economic analysis requirements for all regulators, subject them all to the congressional budget process as a way to ensure basic accountability, and require that all major regulations be approved by Congress before implementation. He also lauded provisions that would bolster capital formation, such as the repeal of the Volcker Rule, the modernization of business development company regulation, and relief for community financial institutions.
Panel Discussion
Diane Katz, Heritage Foundation
Katz claimed that rather than ending TBTF, Dodd-Frank empowers the government agencies that failed during the financial crisis. She lamented that Dodd-Frank extends the government’s oversight authority to financial institutions other than banks, such as insurance companies. She also stated she does not believe the government should establish the tradeoffs between regulation and utilizing economies of scale within the banking industry.
Turning to the SEC disclosure rules, Katz argued that not only is disclosure costly, but the rules are trying to drive different types of corporate behavior and the agency is not wary of the potential for unintended consequences.
Paul Kupiec, American Enterprise Institute
Kupiec criticized Dodd-Frank for not taking the trade-off between financial stability and growth and innovation into account, and for trying to prevent a crisis using massive regulation. He denounced Title II of Dodd-Frank for its complexity and for propping up big banks by allowing them to remain open no matter how big of a loss they take, and argued that Title II leads to the potential for nationalization of the banking industry in the case of another financial crisis. He also said that no one knows how the system is going to be used, so if the plan were to go wrong during a crisis, the system would be where it was before Title II existed. Additionally, Kupiec alluded to the importance of economies of scale in financial services, as he stated that no one has studied what the optimal size of banks should be and therefore the government should not be determining appropriate sizes.
Thaya Brook Knight, Cato Institute
Knight argued that a main theme of Dodd-Frank was prioritizing safety over growth. She stated that lawmakers need to make sure they are looking at both sides of the issue. On Securities and Exchange Commission (SEC) required disclosures, Knight stated that investors are interested in disclosure rules because of divestment, but this may lead to a hijack of the disclosure process, which is dangerous. Additionally, she said that because of disclosure rules, many companies pull out of countries that need industry and investment because they do not want to risk the consequences of not complying with the rules.
David Burton, Heritage Foundation
Burton opined that “Too Big to Fail” (TBTF) increases financial instability because losses are privatized and gains are socialized. Additionally, he argued that the SEC does not have the competency to set disclosure requirements since they have nothing to do with the SEC mission. He discussed that as more and more disclosures are required, the disclosure process becomes counterproductive, and that most investors do not actually care about disclosure. He argued the only reason disclosures are so popular is because there is a large and profitable lobbying and consulting industry built around them. Burton stated that he believes the Financial CHOICE Act will address the disclosure requirements since there is a statement about limiting nonmaterial disclosures in the summary document.
Norbert Michel, Heritage Foundation
Michel commented that under Title II, the OLA subsidiary will be held up, not the holding company. Additionally, he agreed with Katz’ statement that it is not the role of the government to establish the optimal bank size.
Questions
Kupiec and Michel both responded to a question on how the Financial CHOICE Act will impact Title I of Dodd-Frank and the FSOC. Kupiec said that the proposal will get rid of the FSOC’s ability to designate systemically important firms and will eliminate all current designations. He also stated that the FSOC will return to its pre-Dodd-Frank responsibilities of informing the executive branch and sharing information, rather than having independent powers. Michel responded similarly, as he said the Financial CHOICE Act will eliminate the two biggest parts of Title I, the FSOC’s ability to designate firms and the Office of Financial Research.
In response to a question on the banks’ opinions on Title II and the Financial CHOICE Act, Katz stated that the large banks’ opinions are not yet known because the politics around the proposal are not settled enough for them to say anything useful and there should be more vocal opinions after the election. Kupiec also claimed that most large banks have been vocal about their support of Title II and Total Loss Absorbing Capital (TLAC), whereas Michel said community banks and smaller banks should support the Financial CHOICE Act and should never have been put under Basel regulations the same way the large banks were.
Responding to a question on higher capital requirements, Kupiec argued that higher capital requirements and rollbacks on regulations need to be enforced concurrently, as the banks would not trust regulators enough for it to be successfully implemented one policy at a time. Additionally, he stated the government’s reluctance to let banks fail is harmful because it lets institutions take risks when they should not and prevents natural entry and exit into the financial system. Knight responded by opining that banks should be able to set their capital levels themselves because only they know what levels of capital best suit their needs.
For more information on this event, please click here.