§ Legislative Act Governance
Financial System Stability and Consumer Protection
Current Status
Existing Law: Dodd-Frank Wall Street Reform Act (2010), Bank Holding Company Act (12 U.S.C. § 1841), Federal Deposit Insurance Act (12 U.S.C. § 1811), Truth in Lending Act (15 U.S.C. § 1601)
Current Authority: Fragmented across OCC, FDIC, Federal Reserve, CFPB, SEC, CFTC, and state regulators—creating regulatory arbitrage opportunities
Existing Limitations: Capital requirements remain inadequate (4-5% leverage ratios). Shadow banking ($65T+) largely unregulated. No systemic risk pricing mechanism. Consumer protections lack federal APR ceiling. Resolution authority tested but underfunded.
Problem
Specific Harm: 2008 crisis cost $498B in direct federal outlays, $22T in lost GDP (2008-2012)¹. Consumers pay $12B+ annually in overdraft fees alone². Regulatory fragmentation enabled $65T shadow banking sector to operate outside prudential oversight³.
Who is Affected: 330M Americans exposed to systemic risk. 175M banking consumers subject to predatory fee structures. Taxpayers implicitly backstopping $10T+ in mega-bank liabilities without compensation.
Gaps in Current Law: No mechanism to price systemic risk to institutions creating it. Leverage ratios half of crisis-resistant levels (Canada: 18:1 vs. US: 25:1+)⁴. Shadow banking exempt from bank-equivalent oversight. No federal usury ceiling.
Accountability Failures: FSOC lacks binding authority. Regulated entities choose among regulators. Consumers forced into mandatory arbitration⁵. Executive compensation not tied to long-term institutional stability. No independent consumer appeals body outside CFPB enforcement.
Proposed Reform
Primary Policy Change: Establish market-based systemic risk pricing (Public Equity Fees) for mega-banks, double capital requirements, unify financial regulation under single authority, and implement comprehensive consumer protections with independent appeals.
New Requirements:
Banks over $500B pay progressive Public Equity Fees OR voluntarily restructure: (i) $500B to $1T: 0.5% of consolidated assets annually; (ii) $1T to $2T: 1.0% annually; (iii) exceeding $2T: 1.5% annually
Fees calculated using Federal Reserve FR Y-9C quarterly reports, transmitted via Treasury's Financial Data Exchange API with cryptographic verification
Voluntary Restructuring Plans may be submitted to Office of Financial Stability to reduce assets below $500B (exempt from fees during restructuring and permanently upon certified completion)
8% supplementary leverage ratio (replacing current 4-5%)⁴
12% Tier 1 risk-based capital ratio, increasing to 15% for institutions exceeding $250B
3% systemic capital buffer for institutions exceeding $1T, in addition to base requirements
Money market funds: 10% capital buffers, floating NAV (eliminating fixed $1.00 NAV)
Repo transactions: central counterparty clearing with 5-20% standardized haircuts based on collateral quality
Hedge funds/private funds exceeding $5B AUM: SEC registration, maximum 5:1 leverage⁶
Non-bank financial companies exceeding $250B: designated systemically important, subject to bank-equivalent capital and liquidity requirements
Central clearing for all standardized derivatives on regulated exchanges or swap execution facilities
CFTC position limits on speculative derivatives holdings
36% all-in APR cap calculated using military annual percentage rate methodology (32 C.F.R. § 232.4), inclusive of all interest, fees, charges, and ancillary costs⁷
Ability-to-repay verification: documented DTI ratio not exceeding 43%, using IRS Income Verification Express Service API, payroll data, or equivalent
Bank holding companies exceeding $100B: annual resolution plans ("living wills") demonstrating orderly resolution without extraordinary government support
Executive compensation: not less than 60% of annual compensation exceeding $1M vests over five years
Independent Financial Consumer Ombudsman for consumer disputes with binding determination authority up to $100,000
Consumer Financial Complaint Portal with API integration to institution response systems, requiring responses within 15 business days
New Prohibitions:
Naked credit default swaps (where protection buyer holds no insurable interest in reference obligation)
Overdraft fees exceeding $10 per transaction; no more than three overdraft fees per calendar month; transactions processed in chronological order (not largest-first)²
Forced arbitration in consumer financial contracts (pre-dispute arbitration agreements void and unenforceable)⁵
Unregistered hedge funds over $5B AUM
Enforcement:
$500M annual criminal prosecution fund for financial crimes, securities fraud, and violations of this Act
10-year executive compensation clawback for fraud, gross negligence, or conduct contributing to material financial restatement or enforcement action
Directors personally liable for civil penalties where they knowingly approved violating transactions
$200B pre-funded Resolution Fund (maintained through $2B annual assessments) with automatic bail-in triggers: existing shareholders' equity reduced to zero; unsecured creditors' claims converted to equity; insured deposits protected in full; no taxpayer funds absent explicit Congressional appropriation
GAO annual audit of systemic risk models, Public Equity Fee calculations, Resolution Fund adequacy, and capital requirement compliance; findings transmitted to Congress and published
Financial Consumer Ombudsman (OFCO): five-year term, removable only for cause; issues binding determinations; refers systemic violations to CFPB; publishes quarterly reports; OFCO determinations appealable to federal district court; institution non-compliance penalties of $10,000 per day
Definitions:
"Bank holding company": Any company controlling an insured depository institution (12 U.S.C. § 1841)⁸, and any foreign banking organization with US operations exceeding $50B
"Consolidated assets": Total assets as reported on Federal Reserve Form FR Y-9C, calculated as average of four most recent quarterly reports
"Consumer credit": Credit extended primarily for personal, family, or household purposes, including credit cards, personal loans, payday loans, auto title loans, and residential mortgage credit⁹
"Covered financial institution": Any bank holding company, insured depository institution, money market fund, registered hedge fund, or non-bank financial company designated systemically important
"Military annual percentage rate": Cost of credit per 32 C.F.R. § 232.4, inclusive of interest, fees, credit insurance premiums, and all charges incident to credit extension⁷
"Public Equity Fee": Quarterly assessment paid by covered bank holding companies to Treasury as compensation for implicit government guarantees and systemic risk externalities
"Shadow banking entity": Financial intermediary providing credit intermediation, maturity transformation, or liquidity services outside regulated banking system, including money market funds, securities lenders, and structured investment vehicles
What Changes
Before: Mega-banks pay nothing for implicit taxpayer backstop. 4-5% leverage ratios. Fragmented regulation enables arbitrage. $65T shadow banking unregulated. No federal usury cap. Consumers forced into arbitration with no independent appeals. Executives retain bonuses after misconduct.
After: Banks exceeding $500B pay 0.5-1.5% annual fees ($55-85B revenue) OR restructure. 8% leverage ratio (doubled). Unified OFS regulator. Shadow banking subject to capital requirements. 36% federal APR cap⁷. Independent Financial Consumer Ombudsman for binding dispute resolution. 10-year clawback and 60% deferred compensation. GAO audits systemic risk calculations annually.
ROI
Costs:
| Item | 10-Year |
|---|---|
| Regulatory infrastructure | $19B |
| Prosecution fund | $5B |
| OFCO operations | $1B |
| Resolution Fund buildup | $13B |
| Total | $39B |
Savings:
| Item | Gross | Capture | Net |
|---|---|---|---|
| Crisis probability reduction | $1,490-2,490B | 100% | $1,490-2,490B |
| Consumer savings (overdraft + rate caps) | $350-400B | 100% | $350-400B |
| Competition benefits (restructuring) | $200-400B | 50% | $100-200B |
Societal Benefits:
| Benefit | Annual | NPV (3%) | NPV (7%) |
|---|---|---|---|
| Financial stability | $149-249B | $1,273-2,129B | $1,064-1,777B |
| Consumer protection | $35-40B | $299-342B | $250-286B |
| Market competition | $20-40B | $171-342B | $143-286B |
Summary:
| Category | 10-Year | Notes |
|---|---|---|
| Total Costs | $39B | One-time and ongoing implementation |
| Total Benefits | $2,040-3,290B | Crisis reduction plus consumer savings |
| Net Benefit | $2,001-3,251B | 51:1 to 83:1 return on investment |
References
- GAO Financial Regulation Reports (2019-2024); FSOC Annual Reports
- CFPB Overdraft Fee Studies (2023)
- Federal Reserve Supervision Reports
- Canadian OSFI model (zero bank failures since 1985)
- AT&T Mobility v. Concepcion (2011) (arbitration precedent this Act supersedes by statute)
- UK Financial Conduct Authority; EU AIFMD regulatory framework
- Military Lending Act (10 U.S.C. § 987); 32 C.F.R. § 232.4
- Bank Holding Company Act (12 U.S.C. § 1841)
- Truth in Lending Act (15 U.S.C. § 1601)
- Dodd-Frank Act (Pub. L. 111-203)
- Bank of America v. City of Miami (2017)
- German BaFin unified regulation; 20+ state usury caps