Changes to the Dodd-Frank Act have been approved by the House Financial Services Committee, in the form of legislation titled the Financial Choice Act, The New York Times reported.
Dodd-Frank was enacted in large part as a response to the 2008 financial crisis, created in conjunction with the Consumer Finance Protection Bureau. Passed in 2010, Dodd-Frank aimed to protect consumers by ensuring that residential mortgage lenders and other financial institutions follow best practices. CNBC explained there are about 16 major areas of regulation that the legislation put into place, but the four major ones are generally considered to be:
Dodd-Frank created the Financial Stability Oversight Council, which keeps an eye out for situations that could put the financial industry at risk. If a bank grows larger than is typical, the Federal Reserve has the ability to increase its reserve requirement, or the amount of money it has on hand not used for lending or business costs.
It is possible that banks could run out of money, and when they do, they need to keep their consumers protected. Dodd-Frank requires that all banks have a plan of action should they reach this point.
While investing and trading are clearly important for a financial institution's success, it is possible for banks to conduct such activities to the detriment of their consumers or even the institutions themselves. The Volcker Rule prohibits banks from engaging in any trading operations, such as owning or sponsoring hedge funds or private equity funds, for their own profit.
Retailers are charged fees when consumers pay using their debit cards. The Durbin Amendment caps these fees with the idea of protecting the business's financial health.
Like many pieces of legislation, especially those altering the course of business in the financial industry, Dodd-Frank had some opponents when it was passed, and continues to receive criticism. One long-time opponent of the act is Congressman Jeb Hensarling (R-Texas), who is also the chairman of the House Financial Services Committee. Hensarling is the sponsor of the Financial Choice Act, stating that he doesn't believe Dodd-Frank has benefited America since its creation.
"Dodd-Frank was in large part a response to the 2008 financial crisis."
"It has been six years since the passage of Dodd-Frank," Hensarling noted, according to the New York Times. "We were told it would lift our economy, but instead we are stuck in the slowest, weakest, most tepid recovery in the history of the Republic. The economy does not work for working people."
The Financial Choice Act would do several things to reverse Dodd-Frank's rules, including circumstantially nixing some of the regulatory standards banks have been subjected to since 2010. These standards wouldn't apply to a bank if its ratio of capital to total assets remains at 10 percent or more.
Additionally, the Financial Choice Act would take out the Volcker Act and the Durbin Amendment.
Though the Financial Choice Act was unveiled in June and has already been approved by a House committee, it is not expected to have an effect just yet. Writing for Bloomberg's Corporate Transactions Blog, Kristyn Hyland noted that some analysts doubt the bill's ability to be passed by Congress. However, that doesn't mean it isn't important. If it doesn't get passed, it will still likely affect the way opponents of Dodd-Frank propose changes in the future.
The New York Times agreed, stating that though the Financial Choice Act won't go into effect this year, it will make people think hard about financial reform and what they believe is best for the American economy.
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