Overhauling Dodd-Frank May Not Succeed, but Also May Not Matter

Overhauling Dodd-Frank May Not Succeed, but Also May Not Matter

iStockphoto/The Fiscal Times

Nancy Pelosi says President Trump’s call to reshape Dodd-Frank is a “massive con” and that he is putting #WallStreetFirst. Sadly, she has set the tone for Congressional Democrats, siding with Elizabeth Warren progressives who hate Wall Street bankers and absolutely loathe Donald Trump.

Given the toxic political climate, Congress is unlikely to produce a much-needed overhaul of Dodd-Frank. Not only would it be a heavy and politically difficult lift for Republicans, but they also have other priorities, including reforming the collapsing Obamacare healthcare program and our dysfunctional tax system.

Related: The Republican War on Obama’s Regulations Is About to Begin

But here’s a hard truth for the Pelosi-Warren camp: it may not require rewriting Dodd-Frank to soften bank regulation. Having pushed through a bill long on pages (now above 20,000) and short on specifics, financial overseers have had considerable discretion in enforcing vague rules.

Many in the banking industry complain that the law’s interpreters have been too tough, driven by a political agenda that has hurt the economy. Depending on his picks to head up key posts, Trump can quickly turn that tide.  As former Congressman Barney Frank said last November on CNBC, the “main thing [Trump] can do to downplay regulation is appoint regulators who won’t regulate.”     

That may already be happening. According to some in the financial industry, bankers have detected in recent weeks a more reasonable tone in dealing with the Office of the Comptroller of the Currency.  The relief is welcome, and more is to come.  

Why should we care? Because the financial industry greases the economic skids. Many blame the past several years’ sub-par growth partly on a lack of risk-taking and lending in the banking sector.

Related: Trump’s Golden Opportunity: Slashing 179,000 Pages of Federal Regulations

What do bankers want? They want more control over how they manage their businesses and fewer quixotic compliance mandates. They complain that they are spending too much time and money trying to meet arbitrary and changeable rules set down by regulators instead of growing their businesses. They say, for instance, the determination of what constitutes a “systemically important financial institution” is capricious, much like the $10 billion asset threshold for intensive oversight.

Banks are spending hundreds of millions of dollars each year on “stress-testing” and preparing complex “living wills” that most consider a useless academic exercise. They say that the regulators’ inconsistent determination of how banks can meet heightened capital requirements has led many to harbor resources instead of making loans which might spur growth.

The six biggest banks, for example, have accumulated more than $100 billion in excess capital, money beyond that required to meet regulators’ demands; they want the freedom to pay dividends or buy back shares, activities governed by the Fed.

Pam Perdue writes in The Hill, “…since January 2013, banks and credit unions alone have dealt with 1,207 new rules spanning 53,486 pages in the Federal Register.” Those figures come from the Banking Compliance Index, which measures the “incremental cost burden on financial institutions.” In the last quarter alone, according to this measure, banks faced new 6,057 pages outlining 115 new rules, requiring 809 hours of compliance per institution, at a cost of more than $53,000 per bank.

Related: An Economic Agenda for Disruptor Trump

That might not sound dire, except that a study by the Minneapolis Fed showed that adding just two compliance personnel would make one-third of all small banks unprofitable. Since half of all small business loans come from banks with under $10 billion in assets, the sector is vital to an expanding economy. Between 2010 and 2015 the number of community banks (those with less than $10 billion in assets) shrank by 14 percent; many blame regulatory excess.  

In President Trump’s February 3rd executive order he asked for a review of financial regulation and laid down core principles for banking rules. He did not, for the record, command the “dismantling” of Dodd-Frank, as the liberal media has reported. He kept key tenets of the bill, such as banning the use of taxpayer money to bail out failed banks. His appointees to various agencies will be charged with implementing his guidelines, which stress, for instance, fostering “economic growth and vibrant financial markets” and enabling “American companies to be competitive with foreign firms.”  

Importantly, Trump has the opportunity to immediately nominate a vice chairman of supervision at the Fed, a post that was created through Dodd-Frank but never filled by President Obama. Former Treasury official and GE executive David Nason is a leading candidate for the position, a choice that bankers would welcome. Nason runs GE’s Energy Financial Services division and would bring a desirable level of real-world experience to the Fed office. Currently, nearly every person in the supervisory office is an economist, many of whom appear to have been hired straight out of graduate school.

Related: U.S. Banks Gear Up to Fight Dodd-Frank Act's Volcker Rule

Trump can also fill two vacant Fed chairs right away with candidates not hostile to the financial sector. Also, most expect the resignation of Fed Board member Daniel Tarullo who has acted as a banking supervisor and is known for his harsh take on regulation and capital requirements.

Janet Yellen’s term on the Fed runs until 2024, but she is expected to step down when her chairmanship ends early next year. Likewise, Vice Chair Stanley Fisher will likely leave in of July 2018. Consequently, Trump may well be in a position to fill five of seven fed seats over the next year and a half.  

Both the head of the OCC and the FDIC are expected to vacate their posts this year. The remaining key regulator is Consumer Financial Protection Bureau Chief Richard Cordray. His tenure will be determined by the courts which will decide whether the crafting of his position was unconstitutional, as a three-judge panel of the U.S. Court of Appeals for the District of Columbia has claimed.

In short, over the next several months Trump can replace many key officials that have overseen the banking sector in recent years and appoint more business-friendly individuals who agree with his call for rolling back excessive regulation. With Democrats behaving in full spoiler mode, that may be the best we can hope for.