If US health care reform is this hard, can Dodd-Frank reform get passed?
The lessons this week from US health care reform show the potential obstacles that Dodd-Frank reform could face in the next year, if the US government can get there at all. But even if a big repeal effort falters, plenty of less publicized change has already occurred in financial regulation and more is likely to come.
The problem for health care reform has been different visions by US Republicans ranging from the conservative Freedom Caucus to more moderate Republicans. The Freedom Caucus has advocated for removing insurance requirements in the name of lower costs and less regulation, for example not mandating that health care plans cover emergency care. On the other hand, moderate Republicans look at the most conservative health care reform and can't support it - they have a view of a new health care system with greater standards for insurers. While all Republicans want some form of health care reform, there is too wide a chasm in agreement about what reform should actually look like, which could ultimately derail the whole project. Once health care is resolved in whatever form, a debate on taxation is likely next.
After taxes
The plan for big Dodd-Frank reforms now on the table is the Financial CHOICE Act, but already a combination of the US House Financial Services Committee, US House Republicans in general and new appointees to US regulatory bodies means that progress on Dodd-Frank and Basel III is diverging from the original plans.
CHOICE proposes an off-ramp to Dodd-Frank's OTC derivatives rules by letting banks elect a 10% Leverage Ratio in place of today's swaps rules. While 10% sounds pretty onerous, it may turn out to be a very good deal once swaps calculations are taken out of the denominator. Our full analysis of the CHOICE Act is here: Repealing Dodd-Frank: What’s Next for Derivatives and Securities Finance.
As we read the tea leaves, the US may never pass the CHOICE Act. Like health care reform, it may become a much discussed and heated debate but fail to generate enough agreement between conservative and moderate Republicans to move forward. If the CHOICE Act starts to smell like a benefit to big banks, then it will likely die a quick death. We should know by this time next year.
However, important Basel III requirements like the Net Stable Funding Ratio (NSFR) are entirely another matter. US regulators proposed NSFR for the US back in April 2016. The NSFR is well intentioned, but the Basel rules are really quite bad. We have called for a postponement of the NSFR on the basis that it is poorly crafted and will do much more harm than good ("The NSFR should be postponed pending further analysis," July 2016). Since US House Republicans sent a cease and desist letter to Fed Chair Janet Yellen on halting any further US commitment to Basel rules, it is plausible that the NSFR may never see the light of day in the US. If the NSFR is finalized by US regulators, it could easily be reviewed or legislated out of existence by politicians.
Likewise, it seems unlikely today that the SEC will ever get to Dodd-Frank Section 984(b) on securities lending. From the original Dodd-Frank Act: "Not later than 2 years after the date of enactment of this Act, the Commission shall promulgate rules that are designed to increase the transparency of information available to brokers, dealers, and investors, with respect to the loan or borrowing of securities." That was in 2010. We aren't holding our breath for action in the next four years.
The story of health care reform shows how divergent views by US House Republicans could sink big picture financial reform, but less well known changes still have a major impact on US and global financial markets. Whether or not banks have an off-ramp to Dodd-Frank, no NSFR in the US will force Europe, Asia and other regions to take a step back. The lessons of US health care reform remind us to look carefully at the likely actions that will not be taken on the current Dodd-Frank and Basel III road.