In the wake of the Great Recession, the Dodd-Frank regulations were devised to prevent another financial meltdown. The regulations prevented big banks from offering risky loans and required them to maintain higher levels of capital. They also imposed new regulations on credit default swaps and other Wall Street trading practices that had led to the financial crisis of 2007.
Dodd-Frank authorized the creation of several new agencies and committees to keep banks and financial institutions in check. The Consumer Financial Protection Bureau, for instance, eventually recovered over $11 billion for consumers who were cheated by large financial institutions. The Financial Stability Oversight Council and the Federal Insurance Office were created to monitor banks and insurance companies, respectively, that were considered “too big to fail.”
But last month, the House passed the Financial CHOICE Act of 2017 — a big step toward ensuring those financial institutions will fail yet again. If enacted, the act would gut key provisions of the Dodd-Frank regulations.
The bill passed largely along party lines, with most Congressional Republicans and no Democrats voting for it. Rep. Erik Paulsen (R-Minn.) was among those who voted in favor of this reckless and irresponsible act.
According to The Atlantic’s Jeremy Venook, the act “would significantly weaken the Consumer Financial Protection Bureau, which Dodd-Frank established in 2011, and the Federal Housing Finance Agency, which oversees the government-controlled mortgage giants Fannie Mae and Freddie Mac, by allowing the president to fire their heads at will.”
The act would also eliminate the Department of Labor’s fiduciary rule, which requires financial advisors and brokers to act in the best interests of their clients when proffering investment advice.
Finally, the CHOICE Act would repeal the Volcker Rule, which prevents government-insured banks from making risky investments. Without this rule, American taxpayers might again be expected to bail out the big banks for their own mistakes.
Speaker of the House Paul Ryan (R-Wis.) lauded the bill as a move to empower small businesses and crack down on big banks — a truly Orwellian manipulation of the facts. “This is a jobs bill for Main Street,” he said. “It will rein in the overreach of Dodd-Frank that has allowed the big banks to get bigger while small businesses have been unable to get the loans they need to succeed.”
Rep. Paulsen took a similar tack. He tweeted that the act “put [the] interests of small businesses/Main St. first” and would “end ‘Too Big to Fail’ bailouts for Wall Street.”
Later, Paulsen touted the CHOICE Act in his weekly video address. Dodd-Frank, Paulsen explained, was well-intended. But, he argued, the regulatory “overreach” has caused a sharp decline in loans from local banks and financial institutions to small businesses.
Paulsen also said the Dodd-Frank regulations have caused local banks and credit unions to collapse. “We’ve literally lost one community bank or credit union each and every single day,” he said.
Paulsen’s math badly misses the mark. According to the FDIC, just six banks have closed this year. Last year, five banks closed. And in Minnesota, no banks have closed since 2014.
As for credit unions, the National Credit Union Administration reports that this year, two credit unions were purchased or assumed by another entity, or liquidated entirely. Six more have been conserved by the NCUA. Last year, 11 credit unions were liquidated, purchased, or assumed.
So while his one-closing-per-day estimate is way off, Paulsen is right that community banks and credit unions have been declining. But that trend goes back to at least the mid-1980s. In other words, don’t blame Dodd-Frank for community bank failures; bank consolidation has been underway for decades.
Still, some adjustment to financial regulations might be useful. Relaxing standards on capital reserve requirements, for instance, could increase the number of loans to small businesses. But that doesn’t mean Congress should throw out the entirety of Dodd-Frank.
Democrats and advocates for financial reform criticized the CHOICE Act. Lisa Donner, executive director of Americans for Financial Reform, said she was discouraged by the bill. “It is bad for consumers, it is bad for investors, and it’s bad for the stability of the American economy — which is bad for all of us,” she said. “People believe there should be more — not less — regulation of Wall Street. They’re worried about regulators being too weak and being too afraid to take on the big guys. Not about their being tough.”
Featured image via Smithsonian.