WASHINGTON — As a top Republican lawmaker nears the release of a plan aimed at rolling back and replacing the Dodd-Frank Act, bankers are being cautious about offering any support, fearing it may open the door to changes they oppose.
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, is set to offer a preview of his bill June 7 during a speech before the Economic Club in New York. Broadly speaking, the legislation is expected to offer banks a deal: hold more capital in exchange for facing fewer regulations.
Although the banking industry has pressed for regulatory relief since Dodd-Frank was enacted in 2010, they are wary of the plan, seeking more specifics on exactly how it would work.
"We have heard of the regulatory relief proposal related to higher capital for relief from Dodd-Frank and other regulations, but we have not gotten any details on that, but that could mean many things," said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association.
Ballentine raised questions about what trade-offs there would be: "What kind of relief are we talking about?" he said. "If you have this capital [one day] and you don't meet the capital requirements the next day, does the relief disappear in the middle of the night? How are these issues resolved?"
Hensarling has promised that the legislation will be a bold alternative to Dodd-Frank, addressing not only simplified regulation but also big bank resolution, consumer protection and the capital markets. That idea is intriguing, some representatives said.
"It's important to put the whole gambit of regulatory relief items on the table," said Paul Merski, executive vice president of congressional relations and chief economist at the Independent Community Bankers of America.
He noted that thus far the majority of regulatory relief efforts have been done piecemeal.
"Putting it in a large macro framework of regulatory relief would be good. But we haven't seen any draft or specific details," Merski said.
It's clear that the heart of the plan will be focused on capital requirements. In a recent speech, Hensarling said that "the essential core of our plan… [is to] provide vast regulatory relief from Washington micromanagement in exchange for banks who choose to meet high but simple capital requirements."
He added that choosing to hold more capital will be voluntary rather than a requirement, providing a "Dodd-Frank offramp."
Focusing on capital as a better way to regulate banks is a concept that has gained significant traction in recent years. It has been proposed by Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig and Anat Admati, a finance and economics professor at Stanford University, among others.
"Capital requirements, especially if they focus on equity and not on poor substitutes … are a 'regulatory bargain' in the sense that they have numerous benefits and virtually no relevant cost to society," Admati said in an email.
But she cautioned that the "devil is very much in the details" and that what counts as capital will be important. "A marginal tweak that allows lots of ways to get around it might not achieve much," she said.
Hoenig has proposed that banks that focus on core banking activities and hold at least 10% equity capital should be eligible to receive certain exemptions from Dodd-Frank. Such a plan would benefit smaller banks over megabanks.
"They are smaller and it is harder to accommodate the call for extra personnel or consulting services to address some of these added costs, so naturally this will be helpful for community banks if in fact we go in this direction," said Lawrence Goodman, president of the Center for Financial Stability, a nonpartisan think tank focused on financial markets.
Goodman argued that Dodd-Frank has been a hindrance to economic growth, which is creeping along at just 0.5% on an annual rate, according to the latest Bureau of Economic Analysis GDP report.
"We probably need a holistic approach to the issue of financial regulation. My fear is this is going to be tinkering around the edges, which often serves to further confuse the process for the implementation and the process for operating a financial institution," Goodman said.
Aaron Klein, a fellow in economic studies at the Brookings Institution, a nonprofit think tank, was also skeptical of a new plan.
"We are almost at the six-year anniversary mark of Dodd-Frank and I have not seen an alternative," he said. "If Dodd-Frank were so detrimental to America's economy, you would think that in six years somebody would have put out a comprehensive alternative framework."