Five Financial Reform Priorities for Congress in 2015

With Republicans taking control of both the Senate and the House, the new leadership has promised to show that they can work together and with Democrats – and actually get stuff done. Financial policy has long been fertile, bipartisan ground. The recent passage of reforms to the Lincoln Amendment and Collins Amendment, bundled with significant increases in the budgets of the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), showed there is ample room for compromise. If the flurry of year-end financial legislation was any indication, we can expect to see even more activity in 2015.

The Senate Banking, Housing and Urban Affairs Committee has a long history of bipartisan collaboration, and incoming Chairman Richard Shelby is an experienced lawmaker who has a strong track record of finding areas where agreement can be reached. On the House Financial Services Committee, Chairman Hensarling worked with this past Congress to pass a number of legislative proposals through his Committee with strong, bipartisan support. As lawmakers on both sides of the aisle seek ways to improve financial regulation, we believe there is a quite a bit of common ground. Here are five financial regulatory reform issues that the Bipartisan Policy Center believes are ripe for the new Congress to tackle next year.

Establish an independent Inspector General for the Consumer Financial Protection Bureau (CFPB).

Supporters of the CFPB have long said that it should be treated like other independent financial regulators and agencies. Those concerned about the bureau’s actions have called for stronger oversight and accountability. Both sides should agree that despite the CFPB’s placement within the Federal Reserve System, it effectively acts and functions as an independent agency. Therefore, like other independent financial regulators, it should be have its own independent inspector general with full investigative and reporting powers.

Legislation to achieve this goal has gotten traction. The bipartisan “CFPB-IG Act of 2013” (H.R. 3770), introduced by Rep. Steve Stivers (R-OH) and Rep. Tim Walz (D-MN) passed by a 39 to 20 margin in the House Financial Services Committee, while Sen. Rob Portman (R-OH) introduced a similar version of the bill (S. 1310) in the Senate Banking Committee.

Give banking regulators more flexibility to set threshold for enhanced “SIFI supervision” using criteria beyond size.

The Dodd-Frank Act subjected all bank holding companies with more than $50 billion in assets to heightened prudential standards beyond those which smaller banks face. BPC believes the current threshold is too low, which forces regulatory agencies to shift scarce resources away from a focus on the most systemically important financial institutions. Congress should therefore raise the current threshold and give regulators more flexibility over whether to subject institutions that fall both above and below that threshold to enhanced “SIFI supervision.”

A number of top financial regulators, including Federal Reserve Governor Daniel K. Tarullo and Comptroller of the Currency Thomas J. Curry, have publicly acknowledged that this bar was set too low and is too much of a blunt instrument because the size of a bank’s balance sheet is just one factor in determining the risk it poses to the broader financial system. Lawmakers have similarly taken notice. Earlier this year, Representative Blaine Luetkemeyer (R-MO) introduced the “Systemic Risk Designation Improvement Act” (H.R. 4060) to ensure those institutions facing enhanced oversight are not only large in size but globally interconnected and complex. And at a House Financial Services hearing in July, both Democratic and Republican lawmakers expressed concern about whether the $50 billion threshold is appropriate, prompting former House Financial Services Chairman Barney Frank (D-MA) to say that he believes the threshold should be raised.

Streamline the process for resolving large, complex banks to end too-big-to-fail.

The Dodd-Frank Act created several mechanisms to enable regulators to more easily resolve large, complex financial institutions. One was establishing so-called “living wills,” which require each systemically important bank to draw up a blueprint for its demise through the bankruptcy process so that regulators and the firm can make informed decisions in the event of serious financial distress. However, the overall usefulness of these documents has fallen far short of expectations. One reason is that the living wills do not spell out the steps that might be used in the event a firm’s regulators exercise Dodd-Frank’s new failure resolution mechanism, known as Orderly Liquidation Authority, or OLA. Legislation should require living wills to be aligned with the failure resolution tools created by the OLA resolution regime to ensure the law comports with current practice. The current system is somewhat like providing a hammer, a screwdriver, a nail and a screw and then asking for a plan to insert the nail and screw using only the hammer.

Examine financial security before the next data breach.

Whether it is Sony, Target or JPMorgan Chase, cyber attacks seem to becoming more sophisticated, serious and severe. The unique role that the financial sector, and particularly our payment systems, plays in our economy demands that it strong and reliable security measures. This is true both for industry and financial markets as well as financial regulators who are increasingly collecting and storing more data. The Treasury Department, under leadership by Deputy Secretary Sarah Bloom Raskin, has taken important steps to focus attention on cybersecurity among financial markets and regulators, but it is not clear if everyone is responding. Senator Shelby spearheaded major legislation, the Fair and Accurate Credit Transactions Act (FACT Act), that allowed consumers to obtain a free credit report on an annual basis from the big three consumer credit reporting agencies. As chairman of the committee, Shelby led passage through the Senate by a 95-2 final vote for the legislation in 2003. Congress should hold hearings before a serious breach in order to assess whether current efforts among government and private sector actors are likely to be adequate. Congress should also consider whether updates to data security laws are needed in the wake of the most recent attacks and given changes in financial technology.

Hold the independent financial regulators accountable.

Financial regulators are appropriately granted legal independence precisely because they sometimes have to make tough and politically unpopular decisions. Yet, this independence needs to be balanced with public accountability. Strong congressional oversight – through public hearings, private meetings and public discourse – is the best way to achieve this important goal. Leadership of both chambers of Congress ought to continue pushing regulators to work together more efficiently and effectively, better tailor financial regulations to address the unique needs of both banks and non-banks, and robustly monitor the financial system for signs of returns to irresponsible lending or business conduct. In addition to holding regulators accountable, Congress should continue to build on the important progress made last year in increasing the budgets for the SEC and CFTC so that they are adequately funded to meet their enhanced responsibilities and challenges.

NOTE: Aaron Klein, the director of the Financial Regulatory Reform Initiative, is the former chief economist of the Senate Banking Committee and regularly monitors financial policy debates in Congress. He can be reached at [email protected].