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The CHOICE Act Is a Bad Choice for Financial Reform

We may stand at the threshold (or is it precipice?) of repeal of important parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) in the House of Representatives.  (Prospects for repeal in the Senate seem much dimmer.)  At the time of its enactment in 2010, the Dodd-Frank Act was regarded as the most important financial reform legislation since the time of the Great Depression.  Now, scarcely seven years after its enactment, significant elements of the Dodd-Frank Act are targeted by the Republicans in the House of Representatives for outright repeal or significant modification in the Financial CHOICE Act.[1]

There are few precedents in modern political history for such a rapid and fundamental reversal of course.  Consider the significant reform enactments dating from the Great Depression, such as the Securities Act of 1933, the Federal Deposit Insurance Act, and the Glass-Steagall Act.  The basic construct of these enactments remain in place with the exception of certain parts of the Glass-Steagall Act, which were repealed only in 1999, 66 years after their initial enactment.  Consider too the reforms more recently adopted in the Sarbanes-Oxley Act in response to the corporate scandals of the new millennium.  Although assailed by some observers as quack legislation, the Sarbanes-Oxley Act reforms remain in place.[2]

What then explains the revisionist legislative sentiment toward the Dodd-Frank Act?  One possible explanation is an increase in the velocity of change in the financial system since the time of last great financial reform effort.  A more likely explanation is an increase in the ferocity of ideology in the political system since that time.  House Republicans have since the enactment of the Dodd-Frank Act pursued its repeal with an evangelical zeal.[3]  In doing so they would overturn important principles relating to systemic risk that have shaped financial regulation since the time of the financial crisis.

The general failure to detect or adequately weigh the signs of financial instability in the years immediately preceding the financial crisis has served to frame the subsequent discussion of financial reform in the United States.  Even the maestro himself, Alan Greenspan, acknowledged that he was shocked that the pillar of market discipline in free markets had broken down, undermining 40 years of his own reliance on that pillar.[4]  Other postulants of market discipline also felt slapped in the face by the events of the financial crisis.[5]  Many knowledgeable observers called for fundamental changes in the U.S. financial regulatory system.  In broad strokes, if not in fine detail, these observers recommended changes in many of the areas ultimately addressed by the Dodd-Frank Act, such as a systemic regulator for the financial markets, a new resolution option for systemically important financial institutions, a new information infrastructure for financial markets, and the use of clearinghouses for credit default swaps, to mention but a few.[6]  Following the precipitous and precipitating events of September 2008 in the United States, an international consensus on financial reform quickly formed among the G-20 countries in November 2008.[7]  In a move that might in hindsight be regarded as an “America First” step, the United States became one of the first of the G-20 countries to enact comprehensive financial reform legislation in response to the crisis.

The CHOICE Act proposes to repeal or severely circumscribe most of the Dodd-Frank Act provisions aimed at systemic risk.  It would, for example, repeal Title II of the Dodd-Frank Act, which provides for the use of an Orderly Liquidation Authority process as an alternative to the Bankruptcy Code in the event that a systemically important financial institution faces severe financial distress.  As I have explained in an earlier post, the CHOICE Act would also amend the Bankruptcy Code to make it a more reliable mechanism for resolving a systemically important financial institution on a rapid basis.  In my earlier post I argued in favor of the CHOICE Act amendments to the Bankruptcy Code, but against the repeal of Title II, which I maintained should still be retained as a back-up to the Bankruptcy Code.   The CHOICE Act would also repeal most of the provisions in Title I that are aimed at identifying and addressing the sources of systemic risk in the U.S. financial system.  Valid criticisms can be leveled at certain of the actions of the Financial Stability Oversight Council in implementing Title I.  Changes to some of the provisions in Title I should be considered, but a wholesale repeal would be a mistake.

There is one intriguing provision in the CHOICE Act, providing the basis for word “CHOICE” in the title.  The so-called “off ramp” provision would allow large banking institutions to opt out of the enhanced prudential requirements applicable to them under the Dodd-Frank Act in return for maintaining a 10 percent adjusted leverage capital ratio.  Analysts of the banking industry question the utility of the off-ramp provision because currently none of the largest U.S. banks could meet the 10 percent threshold.  Other observers question whether reliance on a single regulatory measure such as a leverage ratio is appropriate in any event.  Moreover, the off-ramp provision, coupled with the repeal of most of the other provisions in Title I, seems to imply that regulation of large banking institutions (whether on or off the ramp) is all that is necessary to address the sources of systemic risk.  This approach runs counter to the widespread belief that much of the outsized risk in the U.S. financial system in 2007‑2008 originated in the unregulated or lightly regulated parts of the system.[8]  Addressing the diverse sources of systemic risk, especially those that may reside in the shadows of the regulated sector, is admittedly a difficult task.  The CHOICE Act does not attempt to frame its own approach to this problem or even to concede that such an approach might be necessary.  Instead it abandons the field.

The CHOICE Act challenges one other fundamental principle that has found wide acceptance in recent decades, namely, the desirability of achieving where possible coordinated international approaches to important financial regulatory issues.  The CHOICE Act would require U.S. financial regulators to consult with Congress and provide for public notice and comment before participating in any process of setting international standards such as through the Basel Committee on Banking Supervision or the Financial Stability Board.[9]  These provisions reflect concerns expressed by some members of Congress that the U.S. regulators are negotiating binding standards for U.S. institutions with “global bureaucrats in foreign lands.”[10]  This current congressional sentiment shows faint recognition of the fact that the U.S. bank regulators initiated the Basel capital process 30 years ago in response to a congressional directive to consult with and encourage the banking authorities in other countries to work together in devising bank capital requirements.[11]  The original congressional directive was intended to address the concern that U.S. banks would be put at a competitive disadvantage if they were subject to more stringent capital requirements than their foreign bank competitors.[12]  The current congressional sentiment also shows scant appreciation of the fact that it is now the European Union authorities who are objecting to Basel initiatives on the ground that the initiatives benefit U.S. banks to the detriment of European banks.[13]

A reassessment of the Dodd-Frank Act is certainly in order, but there have to be better choices for such a reassessment than the Financial CHOICE Act.  There are indications of bipartisan support for revisions to certain provisions in the Dodd-Frank Act. [14]  Regrettably, however, the partisan politics afflicting both parties will likely foreclose any truly bipartisan approach. The war over the Dodd-Frank Act is simply the continuation of party politics by other means.


[1]      The Financial CHOICE Act of 2016, H.R. 5983, 114th Cong. (2016). A revised version of the Financial CHOICE Act is expected to be introduced in the 115th Congress.

[2]      See, e.g., Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance 114 Yale L.J. 1521 (2005).  The notion of quack legislation has been extended to parts of the Dodd-Frank Act as well.  See Stephen M. Bainbridge, Dodd-Frank:  Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779 (2011).

[3]      See, e.g., Statement of Republican Policy on H.R. 4173, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (June 30, 2010), available at hattp:// (likening the Dodd-Frank Act to the “Democrats’ radical plan for ‘fixing’ the nation’s health care system”). Against the auguries, the House Republicans have recently failed in their attempt to “repeal and replace” the “radical” health care plan represented by the Affordable Care Act.  See also Republican Staff of H. Comm. on Financial Services, 113th Cong., Failing to End “Too Big to Fail”:  an Assessment of the Dodd-Frank Act Four Years Later 97 (July 2014) (“by resorting to the same failed strategies and misplaced confidence in the powers of regulation and regulators that led to the financial crisis in the first place, the Dodd-Frank Act squandered [the] opportunity [to break decisively with the past]”).

[4]      The Financial Crisis and the Role of Federal Regulators:  Hearing before the H. Comm. on Oversight and Government Reform, 110 Cong. (2008) (statement of Alan Greenspan).

[5]      See, e.g., Gary Gorton, Slapped in the Face by the Invisible Hand:  Banking and the Panic of 2007,  Speaking shortly before the onset of the financial crisis, Chairman Ben Bernanke also expressed a positive view of the role of the invisible hand in the operation of financial markets.  See Ben S. Bernanke, Chairman of the Bd. of Governors of the Fed. Reserve Sys., Speech at the New York University Law School:  Financial Regulation and the Invisible Hand (Apr. 11, 2007).

[6]      See, e.g., Kenneth R. French et al., The Squam Lake Report:  Fixing The Financial System (2010); Raghuram G. Rajan, Fault Lines:  How Hidden Fractures Still Threaten the World Economy (2010); Viral V. Acharya et al., Restoring Financial Stability:  How to Repair a Failed System (Viral V. Acharya & Matthew Richardson eds., 2009).

[7]      Group of Twenty, Declaration of the Summit on Financial Markets and the World Economy (Nov. 15, 2008), available at

[8]      See sources cited note 6 supra.

[9]      I have elsewhere analyzed the important work of these international bodies in promoting international cooperation in response to the financial crisis.  See Cross-Border Resolution of Banking Groups:  International Initiatives and U.S. Perspectives Part I, 9 Pratt’s Journal of Bankruptcy Law 391 (2013), and Part II, 9 Pratt’s Journal of Bankruptcy Law 583 (2013).

[10]     Letter of Patrick McHenry, Vice Chairman of the Financial Services Committee of the House of Representatives, to Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, dated January 31, 2017.

[11]     The International Lending Supervision Act of 1983 (“ILSA”) required the U.S. banking agencies to establish minimum capital requirements for U.S. banking institutions and to enhance international coordination among bank regulators to strengthen the capital levels of banking institutions.  See 12 U.S.C. §§ 3901 and 3907.

[12]     See Daniel K. Tarullo, Banking on Basel:  The Future of International Financial Regulation 45-54 (2008).  Tarullo discusses the importance that Congress attached to avoiding competitive disadvantages for U.S. banks as capital rules were being implemented under ILSA and suggests that protecting the competitive position of U.S. banks may have been a more important factor than prudential considerations in the efforts of the U.S. banking authorities to coordinate with foreign authorities.  Id. at 54.

[13]     See, e.g., Silla Brush, EU Calls for Sweeping Changes to Basel Bank-Capital Proposal (Sept. 29, 2016), (discussing EU objections that the Basel IV proposals would put EU banks at a disadvantage compared to U.S. banks and other global competitors).

[14]     See, e.g., Bipartisan Policy Center, Did Policymakers Get Post-Crisis Financial Regulation Right?  3 (Sept. 2016) (“Americans have a safer financial regulatory system than before the crisis, but there are some less-than-optimal outcomes and unintended consequences of post-crisis reform that warrant attention”).

This post comes to us from Paul L. Lee, of counsel to Debevoise & Plimpton LLP and a member of the adjunct faculty of Columbia Law School. 

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