What would a GOP version of financial reform look like?

August 30, 2012

Republicans don't like Dodd-Frank, but what would happen to financial reform if they were in the driver's seat? Mitt Romney has vowed to repeal it, but many of the law's biggest critics doubt that will happen, even under a GOP Congress and administration. What's more, Republicans suggest there are other reforms they'd like to see to the financial system.


(Simon Dawson - BLOOMBERG)

Romney, for instance, supports more transparency, strong capital requirements and reforms "to address new forms of complex financial transactions," as he explains in his 59-point economic plan. The GOP platform similarly declares that "the public must never again be left holding the bag for Wall Street giants," affirming the necessity of ending "Too Big to Fail."

So what would a GOP version of financial reform look like? Earlier this summer, I talked to conservative policy wonks and former bank regulators who want an alternative version of Wall Street reform and don't expect full repeal of Dodd-Frank to be the answer. Here are three of their ideas:

1) Bankruptcy reform could be passed to combat “Too Big to Fail”: First and foremost, conservative policy experts believe it’s necessary to take further action to prevent future bank bailouts and many believe that the government could do more on “Too Big to Fail.” One proposal that’s attracting interest in conservative circles is reforming the bankruptcy code, allowing failing banks to go bankrupt in a more orderly fashion without disrupting the entire financial system in the process.

“Creating a path for failure is at the core of the solution to what happened in 2008,” says James Gattusso, a senior research fellow at the Heritage Foundation. Dodd-Frank attempts to get at the same problem through what’s known as “orderly liquidation”: Big banks must now give the FDIC a credible plan for how they’d unwind themselves on their own if they were failing, and the government may force the firms to restructure if they can foresee too much risk—and potential bailouts—in store.

But conservatives believe Dodd-Frank’s approach is ineffective and makes it too easy to put private assets under the auspices of the government. Paul Ryan, for one, has singled out the orderly liquidation rules for repeal. By contrast, supporters of a revised bankruptcy code say their approach “is more predictable and relies on rule of law rather than government officials,” says John Taylor, a former Bush Treasury official and fellow at the Hoover Institution.

2) Obama’s consumer watchdog could be reined in: The Consumer Financial Protection Bureau is one of the few specific policies that Romney has singled out for criticism on the trail, promising it will be closed as part of repeal Dodd-Frank. The conservative policy world is also quite critical of the watchdog, but they there are more incremental changes they'd like to see.

They want to subject the CFPB to greater external oversight, primarily by shifting the source of its funding from the Federal Reserve to Congressional appropriations, as the House GOP has demanded. There’s also interest in restricting the bureau’s authority to regulate what it determines to be “abusive practices.” In sum, “its powers need to be reviewed—they’re so vague, ambiguous and amorphous,” says Gattusso. “They’re not accountable to the executive branch or Congress.”

In fact, some on the right have been willing to defend the CFPB's existence. In the lead-up to the 2008 crisis, for example, mortgage servicers and other firms that weren’t banks largely escaped federal scrutiny, and the CFPB is meant to make oversight more all-encompassing. “There were different rules for different parts of the system,” explains John Dugan, former Comptroller of the Currency appointed by Bush, who believes that it’s appropriate for the CFPB to retain its rule-writing authority and oversight of non-banks.

3) Reforms considered “extraneous” to the 2008 financial crisis could be repealed: Overall, there seems to be a general consensus on the right that Washington needs to do something to prevent another financial crisis that entails massive taxpayer bailouts. “Reforms are necessary—the financial crisis showed us that. Too Big To Fail needs to be dealt with,” says Gattusso.

To that end, however, they argue that reforms that have nothing to do with the root causes of the meltdown should be repealed. “There are a lot of extraneous parts of Dodd-Frank that had nothing to do with the financial crisis,” adds Gattusso. He singles out the Durbin amendment, for instance, which caps the debit-card fees that banks are allowed to charge consumers. “That is simply an attempt at price control that’s not working anyway.”

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