Is it repeal or replace Dodd-Frank? Neither – think more like hitting the ‘refresh’ key

The recent executive action by President Trump regarding the Dodd-Frank Wall Street Reform and Consumer Protection Act is getting much attention. Although six ‘core principles’ were announced, the only substantive part of the executive order was to mandate a report from the U.S. Treasury identifying “any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies,” inconsistent with those six principles. So does this mean the end for Dodd-Frank, the cornerstone regulatory law that has become synonymous with the global financial crisis? In short, I think the answer is “no.”

Dodd-Frank regulations are primarily in statute form and require 60 votes in the U.S. Senate to change significantly; because of this I believe there is virtually zero possibility of a full repeal or replacement. So with a full repeal or replace off the table, what will the Trump Administration hope to accomplish? Let’s call it hitting the ‘refresh’ key. Instead of taking a meaningful bite out of Dodd-Frank or replacing it all together, I believe the Trump Administration will likely “nibble” around the edges of the behemoth law, focusing on the following areas:

      • Less adversarial enforcement:
        The impact on banks depends not on what the Dodd-Frank rules say, but rather on how they are enforced. For example, banks will still be subject to annual stress tests to judge the adequacy of capital and liquidity. However, the stress test scenarios could be changed. Looser scenarios mean it’s easier to hit capital hurdles, which would result in more capital to return to shareholders. Another example is § 619 (12 U.S.C. § 1851) part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, thankfully known by its shorter name, the Volcker Rule. I think that the rule will continue, but the implementation of it needs a new coat of paint…one that is much more lenient. For example, extending the conformance period this July could give banks more time to exit certain illiquid investments. On the other hand, what does the future hold for the Consumer Financial Protection Bureau? That will continue…but likely in a less powerful form. Think of this as a football game, in either the American or international version. The game’s rulebook remains basically the same, but the enforcement of being ‘offside’ may become more accommodating…at the margins.


      • Turnover in leadership
        If tone is set from the top, the Trump administration has a significant opportunity to change the tone of many regulatory agencies in the coming years. Whether we are talking about the new Head of Banking Supervision; the new heads of the SEC, CFTC, FDIC, or OCC; the possible changes at the Consumer Financial Protection Agency; the two vacant seats on the FOMC; or the two additional Seats on the FOMC in 2018, change is surely coming! Nonetheless, change will not happen overnight. And even after a full slate of leadership is installed changes to regulation will again focus primarily on interpretation and enforcement of existing statutes…at the margins.


      • Staying local
        I believe that any meaningful changes will focus outside the large, multi-national money center banks and instead target mid-tier, regional, and community banks. A good example of this is recent decision by the Federal Reserve in January to remove bank holding companies with $50 billion-$250 billion in total assets from the qualitative component of the annual Comprehensive Capital Analysis and Review, which is most often referred to as the ‘stress test.’ All but about a dozen banks in the United States have assets of less than $250 billion. Focusing on this segment of the banking sector would help the Trump Administration narrative of increasing “Main Street” loan growth and thus serve to stimulate overall economic growth…at the margins.


So what do banks themselves think of all of this regulatory debate? That’s a bit complicated. From the U.S. bank perspective, if you strip away the headline rhetoric, there’s no groundswell for wholesale changes. The rules put in place post-crisis have fostered confidence and stability within the banking system that would have seemed impossible five years ago. That said, management teams are not eager to see that confidence erode anytime soon. Moreover, banks have invested significantly in infrastructure to implement the rules currently in place and wouldn’t be eager to see the goal posts moved again. Would they like the stress tests to be a little easier? Or be able to move ROEs from single digit back to low-double digits? Sure, who wouldn’t? But they are not demanding it, and they want nothing to do with any discussion of a modern-day Glass-Steagall, which was a banking regulation enacted by the U.S. Government after the Great Depression.

Further, U.S. banks aren’t unhappy with their current relative position in global markets. Post-financial crisis, they recognized loan losses faster and recapitalized more quickly than their European counterparts, putting them on much stronger competitive ground today. In addition, all the new regulation has made it extremely difficult to challenge U.S. banks as the barriers to entry have worsened. Which is why the rest of the world, and especially Europe, wouldn’t mind to see some changes! One executive was even quoted by Politico as claiming, “It is the perfect instrument to put America first.” Against that backdrop, the United Kingdom is leaving the EU (Brexit) and political uncertainty is increasing across continental Europe.

In the weeks ahead, I think there will be a lot of headlines, many debates, and maybe even some late-night Tweets. But as far as changes are concerned, look for them…at the margins!


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