Alexander Hamilton, one of the founders of our great national experiment (and now namesake of Broadway's biggest hit), once stated that a key benefit of a solid financial system is that "banks become the nurseries of national wealth." However, the Dodd-Frank Act, with its 2,000-plus pages and over 400 regulatory mandates (in addition to the extensive web of existing regulations) has largely impeded banks' abilities to function as such.
In response to the 2008 financial crisis under the guise of ending future bank bailouts, enhancing consumer protection and boosting the overall economy, President Obama signed the wholly partisan Dodd-Frank into law. At its sixth anniversary, there is emerging consensus this law has failed. The big banks are even bigger, "too big to fail" has become enshrined and we continue to lose community banks.
We have experienced six years of subpar economic growth, and constrained credit and access to capital for consumers and small businesses. We have seen some of the lowest business formation rates since the Carter administration.
Our financial system needs regulatory oversight, but we need smart regulation that is proportionate to risk and allows for innovation and growth. The Washington-knows-best, one-size-fits-all mentality is systematically ending the ability of our locally focused, relationship-driven community banks to succeed. In my home state of Arkansas, exemplary community financial institutions are struggling to find ways to continue to best serve their customers under the reality that is Dodd-Frank.
For our nation to thrive, commerce must also grow and thrive, and for commerce to grow and thrive, our capital markets and commercial banking system must be treated as true "nurseries of national wealth" instead of the government-directed utilities they are becoming.
Led by House Financial Services Committee Chairman Jeb Hensarling, Republicans are re-evaluating our financial regulatory system and have proposed an alternative to the status quo: the Financial CHOICE Act.
One of the main pillars of this proposal is redesigning regulatory oversight to foster job creation and economic growth. At the heart of this goal is an alternative regulatory regime, a so-called regulatory "off-ramp" for well-managed, well-capitalized financial institutions. A fundamental tenet of solid banking is to have solid capital, but over the years, regulators have eroded this principle, instead relying on standards that are too prescriptive, too detailed and too complex to evaluate risk.
Under the CHOICE Act, institutions that are highly rated and maintain a 10% non-risked-based capital buffer against losses—a level much higher than capital ratios currently required—can avoid many of the costly and onerous regulations that have stifled innovation and economic development. This would allow bankers to be bankers, by innovating to provide new products, serving their customers and helping the economy grow. Robust capital is the best strategy to promote a resilient banking system, reduce the likelihood and impact of future crises, and protect against the moral hazard of a too broad and overextended safety net.
Another pillar of the CHOICE Act corrects the failure of Dodd-Frank to end the moral hazard of "too big to fail" and the potential for future taxpayer-funded bank bailouts. Dodd-Frank has institutionalized "too big to fail" by enabling government to decide through a nontransparent process what constitutes "systemically important," and by establishing a convoluted resolution process. The CHOICE Act replaces this system with a new, straightforward subchapter of the bankruptcy code to accommodate the failure of a large, complex financial institution. The CHOICE Act will allow these institutions to fail without disrupting the economy or leaving the taxpayers on the hook.
Finally, the CHOICE Act brings increased accountability both in Washington and in bank boardrooms. Agencies with a single partisan director like the Consumer Financial Protection Bureau will answer to bipartisan commissions and will become subject to congressional oversight through the appropriations process. Agencies will also have to perform rigorous cost-benefit analysis of rulemakings, and congressional approval will be needed for any rule that has a significant economic impact. The CHOICE Act also holds bad actors more accountable by increasing penalties for financial fraud and self-dealing.
The comprehensive Financial CHOICE Act will lead to faster economic growth and innovation, reduced moral hazard, better consumer choice and protection and greater regulatory accountability. Simplicity also will lead to more efficient and effective regulatory supervision.
The CHOICE Act represents a better solution to bolster our capital markets and restore our banks as nurseries of national wealth so this great nation will continue to prosper.
Rep. French Hill, R-Ark., is a member of the House Financial Services Committee.