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January 8, 2015

The Republican Strategy To Repeal Dodd-Frank

“On January 7, 2015, Day 2 of the new Congress, the House Republicans put their cards on the table with regard to the 2010 Dodd-Frank financial reforms. The Republicans will chip away along all possible dimensions, using a combination of legislation and pressure on regulators – with the ultimate goal of relaxing the restrictions that have been placed on the activities of very large banks (such as Citigroup and JP Morgan Chase).

“The initial target is the Volcker Rule, which limits the ability of megabanks to place very large proprietary bets – and their ability to incur massive losses, with big negative consequences for the rest of us. But we should expect the House Republican strategy to be applied more broadly, including all kinds of measures that will reduce capital requirements (i.e., make it easier for the largest banks to fund themselves with relatively more debt and less equity, taking more risk while remaining Too Big To Fail and thus benefiting from larger implicit government subsidies.)

“The repeal of Dodd-Frank will not come in one fell swoop. Rather House Republicans are moving in several stages to reduce the scope of the Volcker Rule and to gut its effectiveness.

“The first step in this direction came on Wednesday, with a bill brought to the floor of the House supposedly to “make technical corrections” to Dodd-Frank. This legislation was not considered in the House Financial Services Committee, and was rushed to the House floor without allowing the usual debate or potential for amendments (formally, there was a “suspension” of House rules).

“Buried in this legislation is Title VIII, which will extend the deadline for one important aspect of Volcker Rule compliance to 2019. (The specific topic is by when big banks should divest themselves of some Collateralized Loan Obligations, CLOs – on how these investments function as internal hedge funds at the largest three banks, see this primer from Better Markets, a pro-reform group.)”

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Read the full Baseline Scenario article by Simon Johnson here.

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