What Romney Victory Would Mean for Banks

TAMPA, Fla. - Even if Republican presidential nominee Mitt Romney wins the White House this November, his stated goal to repeal the Dodd-Frank Act is simply not going to happen, according to key congressional GOP members gathered here this week.

Instead, Republicans will try to chip away at what they see as the worst parts of Dodd-Frank, continuing a legislative strategy they began in 2011.

"The word that comes to my mind about what Republicans should do in 2013 is damage control," said Rep. Randy Neugebauer, who chairs the House financial services oversight subcommittee. "And we'll probably do that in pieces."

Republicans are cognizant of multiple factors. For one, those who work on financial policy are acutely aware of the fact that firms have made major changes to their business models in response to the 2010 law. Starting the legislative process over would force companies to adapt again.

Then there are the political considerations, given that provisions of the law, and the general idea of reining in Wall Street, are popular with the general public.

There are also practical concerns. Even the most optimistic Republicans don't expect their party to control 60 Senate seats next year, likely limiting their ability to pass broad financial legislation.

Moreover, there's a question of political oxygen in Washington, where the political debate next year is expected to focus on the federal budget deficit, which would leave little room on the agenda for other big bills.

Given those constraints, congressional Republicans say they plan to pass a series of financial policy bills, each of which is relatively small, but which collectively could have a major impact. The strategy has failed to yield victories so far, but that could change if the Republican Party wins at the ballot box in November.

"I think it will mostly be targeted at certain areas. I think that's where we're going to have most success," said Rep. Shelley Moore Capito, R-W.V., who chairs the House consumer credit subcommittee.

"Major surgery" is what Sen. Johnny Isakson, R-Ga., said the Dodd-Frank law needs. "So it's time to call timeout, throw a penalty flag, get the referees on the field, and let's say, let's take a look at this and see where we can make a law that works and doesn't suppress the economy."

Which parts of Dodd-Frank will the GOP target? The best way to understand their agenda for next year is probably to examine the pieces of financial legislation they've moved over the last two years.

During that time, many of the party's proposals involved reining in the Consumer Financial Protection Bureau and weakening derivatives rules. In those areas, plans are on the shelf that could be implemented as early as January if Republicans can wrangle enough votes in Congress.

In contrast, two other priorities - combating the idea that some firms are too big to fail and reforming Fannie Mae and Freddie Mac - appear unlikely for quick action in 2013, largely because GOP members have not reached a policy consensus on how to proceed.

Based on interviews with lawmakers, here is a guide to what to expect if Romney seizes the White House with regard to financial policy:

Consumer Financial Protection Bureau. Nothing in Dodd-Frank boils the blood of congressional Republicans like the one-year-old consumer agency.

"The creation of this new bureau to ban and ration credit products using totally subjective, discretionary, arbitrary power - that's outrageous," said Rep. Jeb Hensarling, R-Texas, who is thought to be the top candidate to become the chairman of the House Financial Services Committee in January unless he opts to take another position in the party's leadership.

Republicans have proposed a series of changes to the CFPB's structure that they will seek to enact again next year.

One proposal would replace the agency's director with a five-member board. Another plan would make the agency more responsive to lawmakers by subjecting it to the congressional appropriations process. A third proposal would make it easier for other financial regulators to veto a regulation from the consumer agency.

In a July speech, GOP Sen. Richard Shelby, who is in line to become chairman of the Senate Banking Committee if Republicans win control of the Senate, vowed to pursue all three ideas next year.

"The structure of the Bureau should be of concern to anyone who believes in checks and balances and accountability," Shelby told the U.S. Chamber of Commerce.

It is conceivable that Republicans could push for even bigger changes to the CFPB.

"We'll see how far we can push the envelope," said Republican Rep. Scott Garrett of New Jersey.

But so far, congressional Democrats have remained unified in opposition to changes to the CFPB's structure. That opposition may stymie the Republicans even if the GOP controls a majority of votes in the Senate.

"A lot of that will depend on the composition of Congress," said Capito.

Derivatives. This is probably the most promising area for Republicans looking to roll back Dodd-Frank.

Over the last two years, at least nine bills have been introduced in Congress to pare back derivatives rules. Several of those bills have passed the House Financial Services Committee, and some have passed the entire House, often with strong Democratic support.

Among the specific ideas being contemplated are measures that would make it harder for U.S. regulators to see overseas swaps operations, and provide a wider exemption for non-financial firms that use derivatives.

Republicans in both the House and Senate are vowing to push the measures again next year.

"I'm afraid that a lot of the derivatives title is simply going to make credit less accessible, more expensive," said Hensarling, who currently serves as vice chairman of the Financial Services Committee.

With House Democrats already onboard with several of the measures, the key question will be whether they can garner enough support from Senate Democrats.

Too Big to Fail. During interviews in Tampa, several congressional Republicans were harshly critical of Democratic efforts in Dodd-Frank to prevent future bailouts.

"The bill did not end too big to fail. It codified too big to fail," Hensarling said. "And the American people are tired of the bailouts."

Hensarling and other congressional Republicans voted earlier this year to repeal orderly liquidation authority, the process by which bank regulators are supposed to dismantle large, failing financial firms.

Republican bills have also been introduced in both the House and Senate to repeal the authority of regulators to designate large non-bank financial firms as systemically important - a government proclamation that signals to investors that those firms are too big to fail, according to the legislation's backers.

But for now, the Republican bills look more like window dressing than serious policy proposals, because the party hasn't proposed a detailed alternative to what's contained in Dodd-Frank.

Fannie and Freddie. Many Republicans on Capitol Hill have grown tired of the Obama administration's unwillingness to negotiate bipartisan legislation to reform the two government-sponsored mortgage firms.

"We waited patiently, waited patiently, waiting for the phone to ring, listening to the public sweet nothings in our ear," Hensarling said. "That was very disappointing."

So at first glance, a Romney administration might appear to provide an opportunity for Republicans to move forward with their own reform plan. But progress will likely be difficult in 2013, in part because the Romney campaign is signaling that it will devote much of its energy next year to reaching a deficit-reduction deal.

Resolving the future of Fannie and Freddie will likely require presidential leadership, in part because the GOP is split over whether to continue a government guarantee of the mortgage market.

Isakson, one of the real estate industry's closest allies in Congress, has introduced a plan that would phase government guarantees out over time. But it's not clear that his legislation can be squared with the free-market approach favored by Hensarling and Garrett.

Asked if the Republican Party can come together on the issue, Hensarling said, "Yes, I believe so," but he did not elaborate on how a compromise might be reached.

Despite the impediments to reform, Garrett expressed optimism about the prospects for congressional action next year. "If not now, I'm not sure when it gets any easier," he said.

Reining in regulatory agencies. If Shelby becomes chairman of the Senate Banking Committee, he vows to push legislation that would require financial regulators to conduct cost-benefit analyses of every rule they propose.

"No longer could agencies issue rules without first understanding their impact on our economy," Shelby said in his July speech. "Rules would have to be based on solid evidence, not the arbitrary preferences of regulators."

Such legislation could have a bigger impact on the overall implementation of Dodd-Frank than any of the smaller bills that congressional Republicans are pushing. But Shelby's bill will face an uphill fight with Democrats.

Romney has also promised to issue executive orders aimed at reining in regulators, though those proposals lack detail, questions have been raised about their legality, and their potential impact on banking agencies is not clear.

Kevin Wack writes for American Banker

For reprint and licensing requests for this article, click here.
MORE FROM FINANCIAL PLANNING