Over has been a push and pull from

Over the decades, the growth of the US financial
system has experienced numerous developments. There has been a push and pull
from those that are making profits and would prefer the status quo and those
who believe that the structure and regulations are limiting their growth.
Notably, the intricacy of the system has been a major discussion point whereby
some believe that the system is overregulated considering both the state and
federal governments have substantial authority over various sectors of the financial
industry. On the other hand, proponents would argue that the complexity of the
system is a way of sharing responsibilities which ensures effectiveness in
service delivery. However, this paper will mostly focus on the current debate
on deregulation and regulation of the industry, specifically repealing the
Dodd-Frank Act and replacing with the Financial Choice Act. Dodd-Frank was
enacted after the 2008 financial crisis and has been instrumental in rebuilding
the country’s economy. However, critics believe that its role has been long
overdue as the economy is back on its feet and would need a re-evaluation of the Dodd-Frank. This debate
has further been enhanced by the change of administration both in the White
House and Congress which are both under the control of Republicans. On June
2017, the House passed the Choice Act which was the first step of repealing the
Dodd-Frank. That said, this paper will first highlight the bank chartering
process, with a brief history of the US financial system then discuss the
current debate of Dodd-Frank vs. Choice Act in detail.

Literature
Review

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The Bank Chartering Process

Since 1863, the US financial system has been operating
under a dual chartering system whereby both the state and federal governments
have their own distinct responsibilities within the financial industry. The
system was further supported by the Office of Comptroller of Currency (OCC)
whose role was mainly to transfer the industry from state regulation to a
national banking structure. The Federal Reserve was introduced 50 years later.  The financial crisis of 1929 further influenced
the creation of more regulatory bodies whose goal has been the protection of taxpayers’ money.

The first step before seeking a charter is seeking the
OCC’s authorization. For new banks, their activities are limited as they can be
either chartered for a special purpose or
full-service operations. Such operations might include cash management banks,
banker’s bank, credit card banks and trust banks.  Distinct legal authorities charter FSAs and
National Banks. However, most of the regulations are universal, that is for
both the state and federal authorities. Although there are similarities in the
chartering process, there are unique issues for each bank. As such, the OCC
first ensures that the applicable laws have been adhered to by the new bank. Consent of charter application is
granted by the OCC in two steps, the final and preliminary conditional
approval. Basically, the preliminary conditional approval is like the window
period whereby the OCC expects the applicant to organize their operations. The organization stage will include activities
such as creating their own policies, seeking capital and hiring staff. However,
most of the requirements are determined by the OCC. Once the applicant has
fully satisfied all requirements as set by the OCC, they are then issued with a
bank charter. Application of charter may be denied on several grounds. First,
failure of the business plan to satisfy compliance, CRA or significant
supervisory which is unique on the type of bank. Second, the OCC might deny
charter on grounds of failure to adhere to the OCC’s policies, regulation or
other applicable laws. Lastly, the OCC might withhold a charter if all the
requested information is not provided (Office of the Comptroller of
the Currency, 2016).

Current Debates

Understanding the debates on the financial industry
first require a brief overview of the various regulatory agencies within the
country. The US financial market is perhaps the most complex system overseen by
equally intricate regulatory institutions. There are numerous bodies that focus
on niche sectors within the financial industry both at the federal and state
level. State governments control the US insurance industry. Three agencies
oversee commercial banking at the national level namely the Federal
Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency
(OCC), and the Federal Reserve System. As of 2005, credit unions and thrifts were
supervised and regulated by two bodies namely the National Credit Union
Administration (NCUA) and the OTS (Thrift Supervision) respectively. The SEC
(Securities and Exchange Commission) oversees the governance of the securities
sector. In housing, there are various agencies which regulate the sector all
under the Office of Federal Housing Enterprise Oversight (OFHEO). Additionally,
other niche agencies like the Pension Benefit Guaranty Corporation exists which
is under the Department of Labor whose role is to offer oversight on Employee
Benefits Security Administration. Also, rural cooperatives, ranchers, and farmers had their own agency, the
Farm Credit Administration which supervised lenders and other
agriculture-related entities (Kushmeider, 2005). Most of these agencies have been formed to reduce the
effects of crisis within the financial industry.

After
the 2008 financial crisis, President Obama’s administration introduced several
measures that would drive the country towards recovery including legislating
the Dodd-Frank Wall Street Reform and
Consumer Protection Act. However, the present administration recently ignited debates on
the fate of Dodd-Frank. Key provisions of the Act include the Consumer
Financial Protection Bureau (CFPB) whose role remains under threat (Richardson,
Schoenholtz, Tuckman & White, 2017). On June 8, 2017, President Trump’s
administration initiated the first step of replacing Dodd-Frank after the
Financial Choice Act was passed in the Republican-controlled Congress (Cox,
2017). 

Comparison
of the Dodd-Frank and Financial Choice Act

Dodd-Frank
Act

The Act
was introduced to tighten the requirements for capital in banks and further
regulate some non-banking institutions. The main idea of the Act was to ensure
that financial institutions such as banks maintain sufficient reserve which
would account for any event of a failure
in the financial system. The first part of the Act required that individual regulators
set a base threshold for capital requirements which should be higher than that
of depository organizations as per July 2010 when he act was passed. In a case
where any lender or insurance company goes above this threshold, it would be
classified as Systematically Important Financial Institution and trigger more
regulation from the Financial Stability Oversight Council (FSOC) in most cases
limiting its activities. For instance, maintaining an 8% minimum capital
requirement against its assets for banks. They would also be expected to have
at least 3% of Tier 1 capital of adjusted cumulative portfolio. This means that
they need to have sufficiently diversified their risk, properly managed on-and
off-balance sheet, high liquidity and no excessive risk exposure on interest
rates. Basically, the oversight council would assign the role to the primary
regulatory body such as the NCUA, Federal Reserve, FDIC and the OCC (both
thrifts and banks) (Murphy, 2015).

Financial Choice Act

Commonly regarded as an Act that would allow financial
institutions to increase their risk exposure as opposed to the limitations
under the Dodd-Frank Act, the Financial
Choice Act has fewer regulations compared to the Dodd-Frank after most of most
of the key provisions in the Dodd-Frank were repealed. Most notably, first, the
FDIC’s oversight role would be reduced and most of its functions have been
transferred to the Federal Reserve. Second, the CFPB will be reorganized to
allow the president to have the authority of appointing its director and
deputy. Further, the previous role of the CFPB to enforce actions pertaining to
practices that they believed to be abusive or unfair was removed and the board
further reconstituted and given a new name. 
Third, the Act repealed the Orderly Liquidation Authority (OLA) which
had the role of rescuing failing
financial institutions as stipulated in the Dodd-Frank. Proponents of the
Choice Act argue that the Dodd-Frank Act
was biased to large financial institutions which have higher capital levels and
could operate with minimal risk but still make huge profits as opposed to small
institutions which have low capital and require loans to survive (Richardson,
Schoenholtz, Tuckman & White, 2017).

Summary
& Conclusion

The US financial system is arguably the most complex
in the world. This complexity has been achieved after years of developments
within the financial industry particularly market crisis whose effects are
strongly felt by the citizens. The OCC oversees the bank chartering process.
The chartering process first involves seeking application from the OCC which
determines the eligibility of the applicant. If eligible, the OCC will grant a
preliminary conditional approval whereby it would expect the applicants to adhere
to certain negotiable requirements such as capital, staff, and deposits. Once the applicant adheres to these
requirements, the OCC grants a final approval whereby they receive a banking
charter.

Both the Dodd-Frank and the Choice Act have important provisions that seek to both
secure the taxpayers and ensure the growth of the economy. First, the
Dodd-Frank was relevant at the time of its enactment at a time when the
country’s financial system needed tougher oversight. Dodd-Frank’s reforms
ensured that financial institutions reduce risk while maintaining sufficient
capital that would cushion the institutions in times of crisis. The capital
threshold was necessary considering the government had to bail out the big
financial institutions during the 2008 financial crisis, a price which had to
be paid by taxpayers. Also, the country’s financial system has tremendously
grown over the last years particularly investment banking and the government
had to properly regulate it in order to avoid a more
serious crisis. However, 10 years later, it is clear that the market has fully
recovered and for the industry to maintain its competitive edge across the
globe there need to be reformed on the Dodd-Frank Act. While some of the provisions might set the
country back on an unclear path, most of the provisions are positive. For
instance, reducing the various risk-weighted capital minimum thresholds will
allow small institutions to access credit as opposed the provisions of the
Dodd-Frank Act. Also, Dodd-Frank is
undoubtedly complex making the Act quite expensive; however, provisions such as
reorganization of CFPB would reduce its size hence further reducing government
spending.

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