On the campaign trail and in office, Donald Trump has promised to replace the Dodd-Frank Wall Street regulations, triggering fears that he could unleash a new wave of reckless bankers armed with dangerous and loosely regulated financial practices.
The Dodd-Frank Act was signed into law by Barack Obama in 2010, in response to the financial meltdown of 2008. On Tuesday, Treasury secretary Steven Mnuchin said that if he was king for a day, he would indeed repeal it. But six months into the Trump presidency, the Republican-controlled Congress appears nowhere close to passing a reform bill, in part because no Democratic senators will help any such bill reach a necessary 60-vote threshold.
The bankers remain on the leash.
Earlier this month, the House passed the Financial Choice Act bill, drafted by financial services committee chairman Jeb Hensarling. Hansarling’s bill proposes relieving small regional banks from Dodd-Frank regulations; repealing the Volcker Rule, which restricts bankers from making speculative bets using a bank’s money; and reducing the burden of annual “stress tests”.
Since Hensarling’s bill has little chance of becoming law, the Trump administration is instead moving to enact reform through bank regulators. Mnuchin recently said that 80% of proposals he considers “critical” to overhauling bank rules could be achieved without legislation.
Some experts think this approach lessens the change the Trump administration can effect.
“Between the election and now, we have seen a narrowing and lessening of expectations regarding bank reforms,” said Isaac Boltansky, policy analyst at Compass Point Research and Trading. “Expectations have shifted from broad legislative reform to targeted administrative reform that can be done by regulators.”
Others think the administration can still inflict major and damaging change.
“There is very little question that this administration is engaged in a project to massively deregulate the financial services industry,” said Dennis Kelleher, chief executive of Better Markets, a nonpartisan Wall Street watchdog group. “If they only do half of what they say they’re going to do through the regulatory agencies, the likelihood of another catastrophic financial crash is high.”
Last week, two Trump regulatory appointees told legislators they supported dismantling the Volcker Rule within the framework of existing Dodd-Frank legislation. Such words stood at odds with Trump campaign promises to dismantle “elite” Wall Street banks, as he sought the votes of “ordinary Americans”.
Jerome Powell, the Federal Reserve governor in charge of financial regulation, said he supported adjusting regulations “in common sense ways that will simplify rules and reduce unnecessary regulatory burden”.
Acting comptroller of the currency Keith Noreika, meanwhile, told senators that smaller banks could be solely overseen by his agency; that new banks should not require approval from the Federal Deposit Insurance Corporation (FDIC); and that supervision of lenders should be removed from the Consumer Financial Protection Bureau and placed under banking regulatory bodies.
“We need to avoid imposing unnecessary burden and creating an environment so adverse to risk that banks are inhibited from lending and investing in the businesses and communities they serve,” Noreika said.
The administration also named Jim Clinger, a former aide to Hensarling, to chair the FDIC.
Kelleher, of Better Markets, said: “Trump-appointed regulators are already re-interpreting rules, implementing them differently or clearly signalling they’re not going to enforce some of the rules.
“Regulators on their own have a massive amount of discretion on how they apply and enforce laws. It’s the combination of those two things that enables the banks to engage in high-risk activities that threaten the financial stability of the United States.”
Boltansky, of Compass Point Research and Trading, countered that the US remains a long way from recreating the kind of conditions that caused the 2008 crisis, namely permitting egregious mortgage underwriting.
“We now have very detailed rules about how you underwrite a mortgage and they are not going away,” he said.
In Congress, meanwhile, Democrats and some Republicans, among them senators Elizabeth Warren and John McCain, are looking for ways to revive a version of the Glass-Steagall Act, the 80-year-old statute that kept investment banking and consumer lending separate until it was scrapped under Bill Clinton in 1999.
The Republican party included support for a “21st-century Glass-Steagall” in its election platform. Mnuchin has distanced himself from that pledge, prompting a heated exchange between the secretary and presidential candidate Bernie Sanders during a Senate budget committee hearing.
Mnuchin said Trump opposed actions that would break up big banks. “We think that that would hurt the economy,” he told Sanders, “that would ruin liquidity in the market. What we are focused on is safe and prudent regulation for the large banks so we don’t have taxpayer risk.”
Kelleher argued that a high-risk environment was precisely what the administration risks creating: “The Trump administration talks as if there was no crash and no need to protect the American people from recklessness on Wall Street when we know that recklessness on Wall Street almost caused a second Great Depression.”
That doesn’t mean Dodd-Frank should not be tweaked, Boltansky said.
“One of the problems we’ve had with regulatory reform is that it’s been impossible to do basic tweaks because the political climate is so toxic,” he said. “The majority of Dodd-Frank was thoughtful and well-contoured but of course there are areas that need to be recalibrated.”