President Trump recently issued an executive order directing the Treasury Secretary to report, within 120 days, on what laws and rules promoted or inhibited six core goals of financial regulation: investor choice, economic growth, and international competitiveness, as well as more traditional goals of reducing risk, increasing accountability and preventing bailouts. Though the executive order did not name the Dodd-Frank Act that aims to reform Wall Street, President Trump said: “We expect to be cutting a lot of Dodd-Frank, because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money.”
Despite this Presidential rhetoric, Dodd-Frank is not going to be repealed – that would require 60 votes in the Senate, and the Republicans have only 52. But a Congressional majority can repeal specific aspects of the law that was enacted in 2010 following a financial crisis that nearly destroyed the U.S. financial system, and new agency heads can implement a lot of financial deregulation. In specific, we are likely to see new restrictions on the Consumer Financial Protection Bureau ( CFPB ), more flexibility for the largest financial institutions and substantial regulatory relief for smaller banks.
Under the Congressional Review Act, a majority in Congress can repeal recent regulations adopted within the last 120 legislative business days. Under this Act, the Republican majority will probably repeal the CFPB’s recent rules on prepaid debit cards and payday lenders. These rules provide users of these financial products with disclosure and fee protections, much like those for credit cards, though Senate Republicans have criticized these rules for being overly broad and stifling innovation.
Republicans can also use a majority vote under the budget reconciliation process to subject the CFPB to the normal appropriations process. Under Dodd-Frank, Congress allowed the CFPB to set its own budget, subject to annual caps. In the appropriations process, Republicans are likely to try to set limits on the activities of the CFPB. In the same vein, the US Court for DC last October issued a decision, stayed on appeal, that that the president may remove “without cause” the head of the CPFB. President Trump is highly likely to replace Richard Cordray, the CPFB head that former president Obama appointed, with someone Trump believes will be a less aggressive regulator.
Like the CFPB, the Financial Stability Council is the target of Republican ire. Dodd-Frank created the Council, with representatives from most financial agencies, to identify systemically risky institutions and impose extra regulations to prevent them from failing. Republicans will probably stop the Council from labeling large insurance companies as systemically risky – a label being challenged in court by Met Life as “arbitrary and capricious”. To focus the Council on the mega institutions, Republicans would increase the threshold for systemically risky banks from $50 billion to near $500 billion in assets. Although this increase would require 60 votes in the Senate, moderate Democrats seem to be receptive to an increase to close to $200 billion.
At the same time, the Trump Administration will support the mega banks in delaying the adoption of the latest version of international capital standards called Basle IV. These standards would require a relatively high ratio of bank capital to “adjusted” assets – reduced in value if they are deemed less risky such as US Treasury bonds. Yet prominent Republicans are pushing for a higher leverage ratio for big banks – a ratio of bank capital to assets without any risk adjustments. This could prove a challenge to the U.S. mega banks since their foreign competitors are generally not subject to such a leverage ratio.
There is one important point of bipartisan consensus – that the compliance costs are too high for so-called community banks (with less than $10 billion in assets). According to the 2012 Chairman of the Community Bankers Council, “The cost of regulatory compliance as a share of operating expenses is two-and-a-half times greater for small banks than for large banks.” Executives at community banks complain especially about the recordkeeping, disclosure and other paperwork requirements in five areas:
-Truth in Lending Act and other rules related to the issuance of credit cards
-Real Estate Settlement Procedures Act on modifying residential mortgages
-Bank Secrecy Act and anti-money laundering rules on customer transactions
-Fair Credit Reporting Act and the red flags program on identify theft
-Capital planning and stress tests mandated by the Dodd-Frank Act
Trump appointees will almost certainly reduce these paperwork burdens on community banks, thereby increasing lending volumes in several categories. With their deep expertise in local markets, community banks provide over 70% of all agricultural loans in the U.S. For the same reason, community banks make roughly 50% of the loans to American small businesses. In addition, community banks are significant lenders in real estate, particularly for residential housing.
In short, while Congress will repeal a limited number of laws on financial regulation, Trump officials can accomplish a significant amount of financial deregulation through the administrative process. Thus, Republicans will not be able to repeal the Volcker Rule on proprietary trading by banks, but Trump officials will interpret the Rule much more flexibly.
Robert C. Pozen is a senior lecturer at MIT Sloan School of Management and former executive chairman of MFS Investment Management.