Cheat Sheet: Hensarling Asks for the Moon in Dodd-Frank Revamp

WASHINGTON — House Financial Services Committee Chairman Jeb Hensarling R-Texas, was set Tuesday to unveil an ambitious plan to revamp the Dodd-Frank Act and replace it with a capital-based alternative during a speech in New York.

"Our Republican plan rests on the belief that bank capital is the most basic element in making a financial system healthy, resilient and reliable for economic growth," Hensarling said in remarks prepared for the Economic Club of New York.

The Texas Republican signaled earlier this year that he was working on legislation that would create a separate regulatory framework that banks could choose to follow as an "off-ramp" from Dodd-Frank in return for higher capital requirements.

But the Financial CHOICE Act also includes other sweeping provisions that effectively constitute a wish list for Republicans, including measures to subject all federal regulators to the appropriations process, repeal the Volcker Rule and remove the deference courts traditionally give to the agencies.

As a result, the bill is not just dead on arrival this year, which is no surprise given that President Obama has already said he would oppose changes to Dodd-Frank. It would also face an uphill battle even if the election in November went entirely in the GOP's favor, including seizing the White House and maintaining control of the Senate. Some provisions are certain to anger progressive Democrats like Sen. Elizabeth Warren, D-Mass., and Democrats will undoubtedly maintain enough Senate seats to filibuster any similar bill in that chamber.

Following is a guide to what's in Hensarling's plan.

Capital Alternative

At the heart of Hensarling's proposal is a provision to allow banks to be exempt from a number of Dodd-Frank regulations as well as Basel III capital and liquidity rules if they meet certain requirements, including a simple leverage ratio of at least 10% and a Camels rating of 1 or 2.

"Any bank that chooses … to qualify for regulatory relief under our plan will be significantly better capitalized than Dodd-Frank or any U.S. or global regulator currently requires them to be," Hensarling said.

He added that the plan would most likely help community banks in the near term who would have to raise "little to no additional capital" while larger banks would have to "raise significant additional equity capital."

Hensarling said he favors a non-risk-weighted leverage ratio, which differs from current capital requirements because "risk-weighting is simply not as effective."

Structural Changes

The bill would replace the single directors of the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency and Federal Housing Finance Agency with commissions for each agency.

It would also subject all federal regulators, including the Federal Deposit Insurance Corp. and the Federal Reserve Board, to the congressional appropriations process and require every regulation to pass a "rigorous cost-benefit test."

The Financial CHOICE Act would also rename the CFPB to the Consumer Financial Opportunity Commission put and put in place a Senate-confirmed inspector general for the agency.

"Too Big to Fail"

Hensarling's bill takes direct aim at Dodd-Frank provisions that were put in place to manage "too big to fail" institutions. It would repeal the Financial Stability Oversight Council's power to designate firms as systemically important and subject them to heightened supervision. It would also eliminate the Office of Financial Research.

"This amalgamation of many of the same Washington regulators who failed to do their jobs in the run-up to the last financial crisis is now charged by Dodd-Frank to manage our economy away from the next," Hensarling said.

The plan also includes legislation that would create a new bankruptcy chapter specifically designed to resolve an insolvent megabank and replace Dodd-Frank's Title II.

"Some large firms will likely become smaller, because the credit they now obtain will be priced according to their inherent risk of failure without implicit government guarantees backing firms that are 'too big to fail,' " Hensarling said.

However, he added that the goal of his legislation won't be to break up or shrink the largest financial firms, but rather to "rightsize" them.

"To promote economic growth, we will need both Citibank with an 'i' located a few blocks from here and City Bank with a "y" located in Forney, Texas, in my district. Both types of banks have a vital role to play in revitalizing economic growth," Hensarling said.

Tougher Penalties

While much of Hensarling's plan focuses on reining in regulators, he said it will give the Securities and Exchange Commission more power to crack down on financial crime and fraud.

"We will double the cap for the most serious securities law violations and will allow for triple monetary fines when penalties are tied to illegal profits," Hensarling said. "We will give the SEC new authority to impose sanctions more closely linked to investor losses — and increase punishments even more for repeat offenders.

"Our plan toughens penalties — not out of some ideological or poll-driven war against Wall Street, but simply to better protect consumers and strengthen their markets," he added.

However, he said also said the legislation will improve "due process rights" because "too many citizens have been 'shook down' or abused by their government."

That includes repealing the so-called Chevron deference that federal agencies receive from courts of law when their rules or decisions are taken to court.