NTU Endorses House's Dodd-Frank Replacement

The Honorable Jeb Hensarling
Chairman, Committee on Financial Services
2129 Rayburn HOB
Washington, DC 20515   

Dear Chairman Hensarling, Ranking Member Waters, and Members of the Committee:

On behalf of the members of National Taxpayers Union (NTU), I write in strong support of H.R. 5983, the “Financial CHOICE Act” (CHOICE Act). Without relitigating the proximate cause of the financial crisis of 2008, suffice it to say that the Dodd-Frank law has failed to live up to its promise. A well-functioning financial services industry is vital to continued American prosperity. Yet since the financial crisis of 2008, the federal government has enacted a dizzying array of complicated rules and regulations that have stifled economic growth, further entrenched the so-called “Too Big to Fail” problem, and crushed smaller community banks. Thankfully the CHOICE Act offers a strong alternative to Dodd-Frank and the regulatory morass it created.

Simple solutions to complicated problems are often the most effective. Rather than creating a flurry of complex rules in response to the financial crisis, Congress should have mandated higher capital requirements for financial institutions.  That is why NTU is enthusiastic about the CHOICE Act’s “off ramp” from the bulk of the current Dodd-Frank regulatory regime. By agreeing to hold higher capital in the form of a leverage ratio of at least 10 percent in exchange for regulatory relief, financial institutions would have greater flexibility. Better capitalized financial institutions would have a buffer to guard against downturns or other shocks to the economy, thereby protecting taxpayers from future bailouts.

Another thoughtful aspect of the CHOICE Act is its treatment of the so-called “Too Big to Fail” issue and the resolution of failing firms. Dodd-Frank’s creation of the Financial Stability Oversight Council (FSOC) to designate certain entities as “Systemically Important Financial Institutions” (SIFIs) has, ironically, doubled down on the very policies that led to massive liabilities for taxpayers. Allowing the federal government to designate certain financial institutions as SIFIs creates a market expectation that such firms are “Too Big to Fail” and thus would be rescued by Washington. This is clearly a mistake and thankfully the CHOICE Act rectifies this as applied to non-bank financial institutions. 

Likewise, Title II of Dodd Frank created an alternative to bankruptcy for failing financial institutions known as Orderly Liquidation Authority (OLA). Citing Jeffrey Lacker, the president of the Richmond Federal Reserve Bank, NTU has warned that OLA has made the financial system less stable. The federal government’s ad hoc interventions to save failing financial institutions have created enormous moral hazard, and the OLA did nothing to improve this dynamic. The CHOICE Act wisely repeals Title II and instead offers a new chapter in the bankruptcy code so that large financial institutions that engage in unsustainable practices can fail without posing fundamental risks to the broader system. This straightforward change, based on structural legal processes, would alleviate much of the “discretionary” bailout practices that can give rise to financial crises.

NTU is also pleased with the CHOICE Act’s sensible reforms to the Consumer Financial Protection Bureau (CFPB). Since its establishment with one director and its own funding stream, the CFPB has been unaccountable to taxpayers. The CHOICE Act would change that by converting the leadership structure from a single head to a five person bipartisan commission, similar to the Securities and Exchange Commission, the Commodities Futures Trading Commission, the Federal Trade Commission, and many other independent agencies. Likewise, the CHOICE Act would make the CFPB subject to congressional appropriations, which would obligate lawmakers to exercise more prudent, and regular, oversight. In the post-crisis world, the CFPB has been at the forefront of the regulatory onslaught on the financial services industry. The CHOICE Act would restore some balance to CFPB’s mission and activities.

These major changes to the post-Dodd-Frank regulatory landscape would be enormously beneficial to curbing excessive risk, improving market-based discipline in the financial system, adding accountability to the CFPB, and enhancing protections for taxpayers. NTU is also extremely pleased with the CHOICE Act’s treatment of other financial services rules. Specifically, we applaud the Act’s repeal of the Durbin Amendment’s price controls on interchange fees; repeal of the Volcker Rule that is inhibiting capital formation; repeal of so-called Chevron Deference as it relates to financial services regulation; and subjecting financial regulation to the REINS Act’s safeguards against executive branch overreach.

A related issue to H.R. 5983 bears mentioning here. Beginning in 1989, NTU has urged Congress to mandate that Fannie Mae and Freddie Mac maintain heightened capital requirements to guard against a taxpayer rescue of the massive government-sponsored enterprises (GSEs). Our calls went unheeded and the results were disastrous. While Dodd-Frank did not address housing finance reform or Fannie and Freddie, NTU remains concerned about the risks to taxpayers they currently pose. The Obama administration’s so-called “net worth sweep” has put the GSEs in a precarious position – leaving taxpayers exposed to further bailouts.  Addressing housing finance reform and the GSEs should remain a top priority for the House Financial Services Committee.

NTU is pleased to endorse the CHOICE Act. We urge all Representatives to cosponsor your legislation and work towards its swift passage.

Clark Packard
Counsel and Government Affairs Manager