Congress Moves To Weaken Dodd-Frank Reforms That Officials Want Strengthened

The House Financial Services Committee advanced a package of bills Tuesday that would weaken major regulations included in the 2010 Dodd-Frank Wall Street Reform Act, doing so over the objections of the Obama Administration with bipartisan support.

The legislative package, which has been criticized by both current Treasury Secretary Jack Lew and his predecessor, consisted of six bills that would weaken the regulation of derivatives. Derivatives are the the financial instruments that were at the “center of the storm” that caused the financial crisis, according to the Financial Crisis Inquiry Commission. Nevertheless, those regulations have emerged as a key target for opponents of reform and the financial industry.

One of the most significant rules the package would weaken is the so-called “push-out” provision that would limit derivatives trading at banks and financial institutions that are insured by the federal government. But rather than weaken the push-out rules, Congress should be making them even stronger, former Federal Deposit Insurance Commission chair Sheila Bair told Bloomberg:

If Congress wants to re-open Dodd-Frank on this question, if anything, they should push all derivatives activities (other than the banks’ own hedges) into affiliates outside of the insured bank,” Bair said in an e-mail. “This would force market funding of derivatives thus providing substantially greater market discipline than permitting them to be funded with insured deposits.”

Like the Volcker Rule, which would limit forms of risky trading at federally-insured banks, the push-out rule is meant to make the large institutions that were at the center of the financial crisis safer. But the Financial Services Committee, chaired by noted Dodd-Frank opponent Rep. Jeb Hensarling (R-TX), has repeatedly passed legislation weakening derivatives reforms since the law passed. At one point in 2012, there were nine separate pieces of legislation aimed at the regulation of derivatives pending in Congress. “These proposals threaten to create large oversight-free zones that could allow risky behaviors to flourish,” advocacy group Public Citizen wrote of such legislation in 2012.

The package of legislation isn’t expected to move forward in the Senate, according to Rep. Jim Himes (D-CT), one of the sponsors. But Congress isn’t just taking aim at the rules: in recent years, it has gutted the budget for the Commodity Futures Trading Commission, the agency tasked with enforcing the new derivatives rules.