The Financial CHOICE Act is a likely point of departure for regulatory reform of Dodd-Frank. The Trump Transition team has recently announced that they plan on “dismantling” Dodd-Frank.[1] A logical first place to look for a Republican blueprint for “dismantling” Dodd-Frank is the Financial CHOICE[2] Act (CHOICE Act).

The CHOICE Act aims to simplify the regulatory process by putting a premium on clarity. Below we’ve highlighted four key areas of the CHOICE Act that may allow it to work.


Dodd-Frank Off Ramp

The Dodd-Frank “Off-Ramp”

The CHOICE Act’s Off-Ramp Provisions will create a means of circumventing many of Dodd-Frank’s requirements, including the Basel III capital and liquidity standards, and the ‘heightened prudential standards’ under Dodd-Frank section 165. Effectively, the off-ramp provisions may allow a firm to avoid or limit their need for adherence to the Comprehensive Capital Analysis and Review(CCAR). To use the “off-ramp” financial institutions are required to maintain at least a 10% leverage ratio and a composite CAMELS rating of 1 or 2.

It is hard to determine exactly how much pushback on these provisions may be expected from Democratic lawmakers. In accordance with Basel III, the Federal Reserve only requires SIFIs to maintain a leverage ratio greater than 6%. The “off-ramp” would require a two-thirds increase in capital requirements. Democratic lawmakers, however, may reject the absence of a risk-weighted ratio to complement the leverage ratio, especially in the absence of other Dodd-Frank compliance requirements. Republicans will likely push back, questioning the efficacy and complexity of these requirements. It may be the case that several Senate Democrats will accept the principle of an “off-ramp,” instead focusing on how the “off-ramp” capital requirements will be calculated, and how much capital will be required to escape the Dodd-Frank requirements. In this case, Republicans may attempt to steer Democrats toward the least complex and least onerous changes.


Bankruptcy Not Bailouts

These provisions will replace the Orderly Liquidation Authority (OLA) with a new title to bankruptcy code and will remove several “bail-out” powers. Among the changes will be limitations on the Feds emergency lending authority under Section 13(3) of the Federal Reserve Act.

While placing limitations on several “bail-out” powers may attract bipartisan support, the looming shadow of the Lehman bankruptcy will make a full repeal of the OLA an unsavory prospect. In the aftermath of the Financial Crisis of 2008, there has been an ongoing debate about the risk of moral hazard in using government funds to “bail-out” so called “too big to fail” financial institutions. While such moral hazard remains unpalatable to many lawmakers, the difficulties of unwinding a massive and complex financial institution through a more conventional bankruptcy procedure will make many Democratic lawmakers unwilling to change the law.

While a new chapter of the bankruptcy code may allow lawmakers to correct some of the problems found when unwinding Lehman brothers, Democratic lawmakers may prefer to keep the OLA process in place, in large part because the OLA FDIC receivership process allows for a “softer landing” for failing financial institutions. This likely will be one of the provisions that Republicans have an uphill climb in passing.


Reform of the Consumer Financial Protection Bureau (CFPB)

These provisions weaken the CFPB but do not remove it. They reform the CFPB in several ways including replacing the Bureau’s sole Director with a multi-member, bipartisan commission, giving courts more power to overturn CFPB rulings, requiring cost benefit analysis for new CFPB regulations, and providing for congressional veto of those new regulations.

It is unclear exactly how controversial these provisions will be to Democratic lawmakers. Democratic lawmakers will cite the CFPB’s successes in helping to protect consumers from financial fraud and manipulation as grounds for not putting checks on its power. However, some Democratic lawmakers may be convinced to accept controls on the CFPB’s administrative power.



Federal Reserve Living Will and Stress Test Reform

These provisions keep the Living Will and Stress Tests of Dodd Frank, but will make living wills a bi-yearly requirement and put the onus on the regulators to create a more clear and transparent process for stress testing. Organizations that currently submit living wills will continue to submit living wills. However, living wills will only be required once every two years and regulators will be required to provide feedback within six months of submission. Additionally, regulators will be required to publicly disclose their assessment frameworks. Moreover, regulators will be required to clarify stress testing requirements and publish a summary of all stress test results.

Whether or not Democratic Lawmakers pushback on these provisions may be irrelevant.  If bipartisan support cannot be found to pass these provisions legislatively, many of these changes may be enacted through regulatory change. Dodd-Frank Section 165 does not prohibit these changes.


[2] “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.”