In a vote split along party lines, the Republican-controlled House approved a 600-page deregulation bill that reverses the Obama administration's handling of large bank failures and dismantles large portions of the Dodd-Frank reform law passed after the 2008 financial crisis.
The proposal, known as the Financial Choice Act, passed the House without Democrat support in a vote of 233 to 186.
A core concept in the legislation is that it would give big banks the choice of an "off-ramp" from many of the costly and time-consuming rules in Dodd-Frank if they agreed to a higher capital buffer. Republican supporters have argued that their proposal would continue to protect the U.S. economy from risks highlighted when the failure of investment bank Lehman Brothers forced billions of dollars in taxpayer bailouts.
The bill would have the biggest impact on the largest U.S. banks, including Citigroup Inc. (C - Get Report) , JPMorgan Chase & Co. (JPM - Get Report) , Wells Fargo (WFC - Get Report) , Goldman Sachs (GS - Get Report) , Morgan Stanley (MS - Get Report) and Bank of America Corp. (BAC - Get Report) .
Among other things, companies that agree to participate could obtain relief from the costly Volcker Rule, which prohibits institutions from trading on their own behalf or owning substantial stakes in hedge funds or private equity.
The bill has no chance of surviving in its current form in the Senate, however. Lawmakers on the Senate Banking Committee, led by Sen. Mike Crapo, R-Idaho, are expected to develop their own package of bank reform measures, which are likely to include some provisions approved by the House.
A key reason for the dismal odds is that Republicans have only a 52-seat majority in the Senate, and 60 votes are needed to overcome a filibuster, which can block passage. As a result, the Senate bill would need the backing of some Democrats, particularly those on the Senate banking panel, such as Jon Tester of Montana, Mark Warner of Virginia and Heidi Heitkamp of North Dakota.
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The Choice Act's fate "is already sealed, as the Senate is expected to focus on crafting its own package of reforms that can clear a 60-vote-threshold," Isaac Boltansky of research firm Compass Point said in a report. "We continue to believe that the Senate will ultimately dictate the size and scope of the regulatory-relief effort."
The House bill's passage comes as the Treasury Department prepares to release a report detailing the Trump administration's own plan for rewriting bank rules, which will likely influence the final bill.
Among the current provisions likely to die because of Democratic opposition are restrictions on the authority of the Consumer Financial Protection Bureau, set up to protect individual taxpayers from predatory lending practices.
Editors' pick: Originally published June 8.
Another controversial section eliminates so-called Orderly Liquidation Authority, which allows the government to initially employ taxpayer dollars to dismantle big banks in a way that doesn't cause collateral damage to the markets. It was crafted in response to the financial havoc after Lehman's failure, which the government tried unsuccessfully to prevent.
As an alternative, the bill and its main sponsor, Rep. Jeb Hensarling, R-Texas, offer changes to the existing Chapter 11 regime for financial institutions. The new bill's system, they say, replaces taxpayer funds with the Financial Choice Act's "loss-absorbing" capital buffer.
The liquidation authority was criticized by Hensarling and other Republicans for giving regulators too much discretion to pick winners and losers among junior and senior creditors, depending on their political stripes. They also contend that the system enshrines too-big-to-fail companies by allowing for taxpayer-funded backdoor bailouts of large creditors, which would likely be banks.
Democrats, on the other hand, say liquidation authority isn't a bailout because any taxpayer funds employed would be repaid by asset sales and a follow-up assessment on all the biggest banks.
Rep. Maxine Waters of California, the top Democrat on the House Financial Services Committee, argued that such authority is needed because it provides an emergency mechanism that allows companies to fail safely.
The Choice Act also includes a mostly-ignored provision that would make it next to impossible for shareholders to submit proposals for consideration at U.S. corporations. To do so, they would have to hold 1% of the target's stock for three years, rather than just $2,000 worth of shares for a year.
The provision would effectively end a system in which retail and institutional investors submit hundreds of proposals annually on subjects from the removal of anti-takeover protections to environmental policy.
Institutional investors who oppose the measure argue that it would have the unintended consequence of pushing more shareholders to back activist hedge funds in proxy fights since they wouldn't be able to act on their own.
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