The effect of regulation on banks and the products they offer has been a core treasury concern for some time. And it has become accepted that, like taxes, regulation generally only moves in one direction: Up. The US Financial Choice Act is that rare beast, an attempt to roll back regulation which, according to the Act’s proponents, has damaged banks’ ability to perform key functions.
The Act was introduced by Texas Congressman Jeb Hensarling who chairs the House Financial Services Committee. His main aim is to release small banks and credit unions from the provisions of the 2010 Dodd-Frank legislation as he explained on NPR, “Free checking at banks has been cut in half. Banking fees have gone up. Working people are finding it more difficult to get mortgages.” And later, “Our plan replaces Dodd-Frank’s growth-strangling regulations on small banks and credit unions with reforms that expand access to capital so small businesses on Main Street can grow and create jobs.”
The US Financial Choice Act provides what is being called an ‘off-ramp’ from Dodd-Frank’s regulatory regime and is designed to free banks from certain regulations provided that they raise their leverage ratios. So, it:
• Exempts banks from constraints such as stress tests, so long as the bank maintains a minimum leverage ratio of at least 10%.
• Subjects banks to stress tests every other year instead of every year and requires that the different conditions under which stress tests are performed be made open to the public and given their appropriate comment period.
• Increases the possible penalties for wrongdoing in financial markets.
• Repeals the Volcker rule.
• Repeals the government’s orderly liquidation authority (power to wind up financial firms), and create new rules for such firms to go through bankruptcy instead.
• Removes regulators’ authority to designate large non-bank financial firms as “systemically important financial institutions” subject to stricter rules.
• Modifies capital rules to give banks more flexibility in how they manage “operational risks”.
• Abolishes the Office of Financial Research, an agency created by Dodd-Frank to monitor the financial system.
The Act also proposes changes to a number of rules concerning shareholder rights, communications with the SEC about public offerings and to the way in which the SEC is managed. In consumer finance, it proposes a cap on debt card transaction fees and strips the Consumer Financial Protection Bureau of its powers to write rules and supervise firms.
It is clear that for smaller, consumer-driven institutions, freedom from the key constraints of Dodd-Frank is significant. But what does the US Financial Choice Act mean for corporate treasurers? Well, in theory, if the large banks raise additional capital – and the amount depends on the final leverage ratio agreed – then they would be free of a number of significant Dodd-Frank constraints and may be able to offer a wider range of products and services at potential reduced pricing. The other deregulatory measures – such as the repeal of the Volcker Rule – would work to the same end.
However, first, the Act has to clear the Senate and there seems to be reasonably unanimous agreement that nothing like the Act in its present form will do that. Second, in common with legislators around the world, it seems as though the instinct in the US to fight yesterday’s battles is stronger than the desire to face the issues of today. In reality, technological advances are likely to transform the corporate treasury landscape far more quickly and profoundly than this Act.
But like all issues concerning regulation, this is one to watch in the next 12 months and to ask your bank, once the US Financial Choice Act is passed, what it will mean for its corporate customers.