Karen Shaw Petrou’s memorandum to the Federal Financial Analytics clients on the Dodd-Frank reform plan, how Jeb Hensarling advances the marxist dialectic.
TO: Federal Financial Analytics Clients
FROM: Karen Shaw Petrou
DATE: June 10, 2016
Dodd-Frank – How Jeb Hensarling Advances The Marxist Dialectic
In the traditional Marxist dialectic, there is a thesis, then an antithesis and finally a synthesis that create a new historical reality. In U.S. financial policy, there is a thesis – Dodd-Frank, an antithesis – reform plans such as those offered from opposing political corners by Rep. Hensarling and Sen. Warren, and then, perhaps, coming synthesis in a potent 2017 legislative package. For all the profound policy arguments and personal aspersions thrown at each other on financial policy, progressive Democrats and Tea Party Republicans share common goals: imposing a high leverage charge on the largest U.S. banks and breaking them up. One might think that, despite this high-level agreement, the way each side wants to savage GSIBs will tear them asunder, but I think many of the differences are far more rhetorical than real. If each side disciplines itself and exploits areas of commonality with the other, something really might get done next year even if it’s something no one in the industry much likes.
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A look at the capital and break-up proposals demonstrates the surprising commonality of the liberal and conservative agendas. Rep. Hensarling wants a leverage-capital requirement of ten percent to serve as a get-out-of-jail-free card from much of Dodd-Frank. He rightly says most community banks would meet this now and that the biggest banks would need to raise billions above those already painfully raised to meet the supplementary leverage ratio (SLR). A bipartisan bill from the last Congress to impose a punitive capital charge picked a fifteen percent threshold and offered no regulatory relief for big banks, although it expressly exempts community banks. Would Republicans accept a high leverage ratio without all of Rep. Hensarling’s regulatory rollbacks? Would Democrats go for a slightly lower number if they can keep some Dodd-Frank requirements and enact an array of small-bank relief provisions? Unless one side or the other inserts a poison pill in its legislative package, there’s a lot of room for compromise that totally skewers the nation’s largest banks and thus makes vast swaths of a very disgruntled electorate very happy.
The same holds true for break-up proposals. Rep. Hensarling believes the combination of high capital and an end to OLA will force the biggest banks to shrink substantially – what Douglas Holtz-Eakin called a “market-incentive” approach to GSIB restructuring. Joined by GOP stalwart Sen. McCain, Sen. Warren wants a more explicit break-up that tackles big banks by banning certain activities, including the proprietary trading Rep. Hensarling thinks should be reinstated via repeal of the Volcker Rule. Sen. Sanders of course sides very much with Sens. Warren and McCain, although he’s also a fan of size ceilings.
As with the capital point, there is a large gap between the two sides of the break-up battle on many specific provisions. But, also like the capital question, progressives and Tea Party Republicans agree on the goal: breaking up the biggest banks by size, activity, or both. Even if Rep. Hensarling is comfortable with an activity free-for-all for any big bank that withstands his leverage requirement, community banks want tough activity limits for the biggest banks and will sway many of Rep. Hensarling’s Republican colleagues to this way of thinking.
Of course, there are also chasms between the Hensarling proposal and those offered by progressive Democrats. I can’t think of a single progressive Democrat who would support restructuring the CFPB, putting the FRB supervisory activities under Congressional appropriations, repealing the Chevron Doctrine, or imposing the complex cost-benefit provisions in the GOP bill. However, there is also striking commonality on several other controversial proposals from the FinServ Chairman. For example, he wants to rollback the FRB’s 13(3) emergency-liquidity powers. Read Warren-Vitter legislation on the same issue to see yet another bit of potent cross-pollination. What about repealing OLA? Many liberal Democrats are at least as skeptical as conservative Republicans about the extent to which these provisions preclude future bail-outs and I could easily see bipartisan agreement here as well.
Ditto on repealing FSOC’s systemic designation authority. Discredited by the MetLife decision and barely used even before it, both sides of the aisle agree it doesn’t work even if they differ on what, if anything, should replace it.
We have yet to see where Donald Trump will land when he releases his Dodd-Frank reform plan, although I suspect it will borrow a lot from Rep. Hensarling. The odd woman out in this remarkable coalition of the left and right is Hillary Clinton. Her platform focused principally on shadow banking – an issue that gets no meaningful attention from Democratic progressives and is opposed by conservative Republicans. Pushed by Sen. Sanders, she has already been forced to go harder on big banks than she seemed initially inclined to do. Given the political line-up and the electorate’s sour mood, she may well be forced to join the progressive side of the big-bank battle and try to beat Mr. Trump at this game. If she doesn’t, she clearly runs considerable risk – risk the current political configuration tells her she cannot afford. See the synthesis forming: big banks with a big bull’s-eye, like it or not and regardless of consequence.