WASHINGTON — Democrats drew a line in the sand Wednesday, opposing a provision in a GOP bill that would allow banks to comply with fewer rules in exchange for holding more capital.

The provision is central to the Financial Choice Act, which has been put forward by House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Tex. The bill would provide a regulatory off-ramp for banks that have an average leverage ratio of at least 10%.

Democrats said the deal is effectively a wolf in sheep’s clothing because it would remove restrictions on mergers and acquisitions and would lead to more consolidation within the industry.

“It allows the largest banks to grow truly larger,” Rep. Maxine Waters, D-Calif., said during a hearing on the bill.

Rep. Maxine Waters, D-Calif.
“It allows the largest banks to grow truly larger,” said Rep. Maxine Waters, D-Calif., during a hearing on the bill. Bloomberg News

Michael Barr, a law professor at the University of Michigan who helped craft the Dodd-Frank Act in the early years of the Obama administration, said that the provision “will further increase concentration at the very top of the financial sector and will permit the very largest firms to grow significantly bigger and may stifle competition both in the midsize market and the smaller market. I believe it will increase systemic risk.”

Barr added that "this is not a community banking bill that we are discussing today. It certainly eases restrictions at the very largest firms to engage in merger and acquisition activity … the other measures suggest significantly less oversight of those firms.”

While Democrats touted it as a big-bank giveaway, large institutions are leery of the idea of holding higher capital. Big banks in particular have not been supportive of Hensarling's bill.

During the hearing, Republicans argued that Dodd-Frank helped big banks more than it hurt them.

“A handful of big banks have been the big winners” of Dodd-Frank, said John Allison, the former BB&T chief executive who is now CEO of the Cato Institute. “You will have a lot more consolidation in the industry” if Dodd-Frank goes unchanged, he said.

Rep. Blaine Luetkemeyer, R-Mo., said if the biggest banks embraced the 10% leverage ratio provision, it would make the financial system safer because they would have to add $430 billion to their capital structures in order to become eligible.

One of the carrots for banks if they do choose to hold more capital is relief from Basel III capital requirements, which assigns risk-weights to different types of assets.

Allison said leaving those capital decisions up to bankers “would be good for growth because banks would be more rational with lending capital." He said risk-weighting assets can lead to banks building up concentrations of certain assets that may look safe one day but ultimately increase risk.

But Barr argued that “It has lots of downsides as a sole tool, because without a measure of risky assets you are incentivizing firms to move items both off the balance sheet and also engage in riskier lending activity.”

Democrats’ objections to the bill go much deeper than just the leverage ratio off-ramp. It would also repeal the Federal Deposit Insurance Corp.’s Orderly Liquidation Authority, which is designed to facilitate the unwinding of a mega bank, and get rid of a number of enhanced supervisory requirements. It also makes structural changes to the Consumer Financial Protection Bureau which is a nonstarter for Democrats.

The Financial Choice Act, which is expected to move to a panel markup next week, is an updated version of a bill that passed out of the committee in the last Congress without any Democratic support. It is unlikely to get any more support in the second go round.

“This is the worst bill I have seen in my entire time in Congress and it is breathtaking,” said Stephen F. Lynch, D-Mass.

Democrats also said they need more time to deliberate the bill, which is in contrast to the last Congress, when they deemed it unfixable and decided not to offer any amendments.

This time around, Democrats objected to having just one hearing before the bill goes to a committee vote and said they would hold their own separate hearing on the bill.

The Financial Choice Act is a conglomerate of a number of other bills. Rep. Brad Sherman, D-Calif., asked Hensarling to break the bill up and use a strategy that is being embraced by the Senate Banking Committee to move forward on smaller pieces of legislation.

“There are 12 bills that the Choice Act has swallowed up that have the support of half or more of the Democrats and half or more of the Republicans on this committee, and we ought to be moving those bills separately,” Sherman said.

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