Great News! The Financial Choice Act is Expected to Reverse the Wall Street Regulations on Payday Advance

The House Financial Services Committee conducted hearings on the Financial Choice Act at the start of the month. This Act is a 500+ page bill introduced by the US Representative, Jeb Hensarling (TX-5) who chairs the Committee and is a supporter of the free markets. He wanted to free the small banks, payday advance providers and other credit unions of America from the limitations of Dodd-Frank since Trump thought of running for office. Democrats have been prudent of Hensarling including Sen. Elizabeth Warren who is of the opinion that the bill is a ‘handout to Wall Street’.

The reality is that the financial regulatory system at present is not functioning. Rep. Hensarling said that the consumers need to be protected and not just from Wall Street, but also from Washington. He has taken to address issues, such as debit card coverage fees, bank stress testing and bank bailouts in the Financial Choice Act. The objective of this bill is to create opportunity and hope for consumers, investors and entrepreneurs. The heart of the matter is to create a stable, resilient financial system that offers economic opportunity for Americans. The excessive regulatory restrictions placed by Dodd-Frank have resulted in a system that limits access to capital and credit for the small guys. Small banks have been burdened with a lot of regulations and confusion that have resulted in limiting their ability to provide loans to small businesses.

The Financial Choice Act is symbolic of the things that are missing from Dodd-Frank including how to increase bank lending and the number of financial choices available for the small players who have been hurt by the scandals at the financial institutions on Wall Street. The House of Financial Services Committee voted 34-26 to disassemble some of the elements of the Dodd-Frank regulation.

Tension have been created among Republicans due to some of the elements of the Financial Choice Act and most notably the Durbin amendment that set a cap on the debit-credit transaction fees. Hensarling is hopeful about removing that cap and has realized that more discussion is needed. The average leverage ratio that is levied by banks is another topic of debate. He has predicted that if some of the largest Wall Street organizations want to be exempted from regulations on dividend and capital payouts, they will have to raise hundred billion dollars in new equity.

According to the bill by Hensarling, it offers a off-ramp from the regulatory regime of Dodd-Frank. It requires that various conditions under which a stress test is conducted be open to the public and given significant period for comments. It is unsure whether this bill will bust or boom for the biggest bankers at Wall Street, but the bill will free the banks from the numerous regulations if they bump up their leverage ratios.

Anil Kashyap and Douglas Diamond are 2 scholars from the University of Chicago’s Booth School of Business who have studied and analyzed the financial crises. Douglas noted that there is a renowned paradox about regulating liquidity. He said that the point about having liquidity around is that if consumers draw money out, there is no loss when assets are unloaded. It is kept as a buffer against withdrawals. However, Douglas said that there is a problem because when people are required o hold liquidity since it cannot be utilized to meet the withdrawals, it cannot be used. In most cases it might seem like a contradiction, but Douglas and Kashyap have shown that there are cases where it is not a contradiction. There are cases where the point of holding the right amount of liquidity is to provide the bank with an incentive to hold the amount of liquidity in excess to the amount needed.

The academic community has not supported the argument that making banks more liquid put them in a more stable position in times of crisis. According to Douglas, there is not a consensus in the academic community that says there is a need to regulate liquidity. So, this places Hensarling’s bill as something based on hope.

However, the Financial choice Act looks forward to promoting economic growth and provide more financial freedom to small businesses with an aim to empower Americans over Washington bureaucrats. Diamond said that the thought of regulating the payday advance industry was unnecessary to begin with.