Dodd-Frank reform may be put on back burner

President Trump did not mention it in his speech Tuesday, and a replacement bill is not getting the support it needs to make it through Congress

Mar 2, 2017 @ 4:59 pm

By Bloomberg News

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 looked like a goner when President Donald J. Trump was elected in November. During the campaign, Trump repeatedly blasted the law as a loan-killing, anti-job disaster.

His party is filled with lawmakers who are even more opposed to it than he is. "On behalf of all hardworking, struggling Americans, I will not rest, and the House Financial Services Committee will not rest" until Dodd-Frank is repealed, committee chairman Jeb Hensarling of Texas vowed last May.

Now, though, the drive to wipe out or scale back Dodd-Frank has lost momentum. Trump issued an executive order on Feb. 3 for Treasury Secretary Steven Mnuchin to review the law, but the president made no mention of it in his priority-setting speech to Congress on Feb. 28. As with the Republican vow to repeal Obamacare, the sticking point may be finding a replacement for the law on the books.

"We need to regulate more simply, cut back on unintended consequences, and see if we can recalibrate this," says Douglas Elliott, a partner at management consulting firm Oliver Wyman. "That happens to be an extremely hard thing to do."

Mr. Hensarling does already have a bill in the House, the Financial Choice Act, that's being given long odds. "We think the chances that the bill becomes law are less than 20% — maybe as low as 10%," Brian Gardner, Washington analyst at the investment bank Keefe, Bruyette & Woods, wrote to clients on Feb. 16. Even so, the bill offers a glimpse into Republicans' thinking on how to shape financial regulation.

(More: Advisers' confidence in Trump soars after president's address to Congress)

The Democrats who pushed through Dodd-Frank sought to regulate multiple points in the financial system, because there are lots of places it can fail, from mortgage underwriting to derivatives trading. Republicans prefer to harness market forces to keep companies in line. Where there must be rules, they like them to be simple and broad.

The Hensarling bill's main innovation is to give banks an offramp from some of Dodd-Frank's regulations. But to use it, a bank would have to maintain a leverage ratio of 10% or more. That's a measure of capital, or how much a bank's assets are worth compared with its liabilities, which include customers' deposits and debt owed to bondholders. Roughly, a ratio of 10% means that for every $100 of a bank's assets, it owes only $90. This gives the bank a safety cushion if assets decline in value, much like having equity in a home. Today only some small banks have a cushion that thick. Banks argue that higher capital standards force them to make fewer loans, but their lending as a share of gross domestic product has rebounded — although not to its 2006-07 bubble high —even with a big increase in capital.

Mr. Hensarling makes the case that the market can provide discipline: Shareholders have a strong incentive to make sure their bank behaves responsibly, because they're the first to get wiped out if it fails. When a bank is liquidated, the assets are sold for whatever the market will bear. Shareholders get zero unless there's money left after paying off depositors, lenders, and other creditors.

Unfortunately for Hensarling, his bill is being attacked from all sides. Bankers say the leverage ratio he advocates is unreasonably high. "The U.S. banking system does not need even more capital," Jeremy Newell, general counsel of the Clearing House Association, a trade group of the largest commercial banks, testified to Mr. Hensarling's committee in July.

Congressional Democrats, meanwhile, are wary of relying too much on just the safety cushion. Dodd-Frank mandates especially close supervision of the big banks whose failure would be the most destructive. Dismantling those layers of safeguards would risk a repeat of the financial crisis, argues Maxine Waters of California, the top Democrat on Mr. Hensarling's committee. The Senate, where 60 votes would be required to stop a Democratic filibuster, is the biggest obstacle.

Even advocates of higher capital standards aren't fully behind Mr. Hensarling's bill. Anat Admati, a Stanford finance professor who's argued that banks need far bigger cushions, says she agrees with Mr. Hensarling that some regulations should be rolled back but worries that banks might find ways around leverage ratios by playing accounting games. "If you're going to put all your eggs in one 10% magic number, that number had better be meaningful," she says.

With Obamacare, taxes, and the budget consuming all the oxygen in Washington, Congress may not get around to Dodd-Frank until 2018 or beyond. Even then the changes could be limited, such as regulatory relief for smaller banks that don't pose systemic risks, says KBW's Gardner. Lately, the big banks are putting their lobbying energy into something more subtle: getting the Federal Reserve to ease up on its comprehensive capital analysis and review of big banks, a process known as CCAR.

(More: Delay of DOL fiduciary rule likely to extend beyond 60 days)

"CCAR rules have been ratcheted unreasonably and progressively tighter," Greg Baer, president of the Clearing House Association, wrote in an e-mail. A more industry-friendly CCAR process at the Fed could effectively allow banks to pay out bigger dividends and maintain less capital, amping up their potential return on equity but also their risk. Mr. Trump has some influence over that process, because he can fill three seats on the seven-member Board of Governors of the Federal Reserve System. When it comes to bank regulation, it's not only the laws you write that matter, but the zeal of the watchdogs.


What do you think?

View comments

Recommended for you

Upcoming Event

May 14


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Where in the U.S. are RIAs growing the fastest?

InvestmentNews' deputy editor Robert Hordt talks to senior columnist Jeff Benjamin about his report on how registered investment advisers are faring in different regions of the country.

Latest news & opinion

Top 10 RIAs in the Northeast

These are the largest registered investment advice firms in the Northeastern U.S., in terms of assets under management.

10 predictions for financial advice in 2019

Deloitte expects these 10 changes will hit the financial advice business in 2019.

Midwestern magic? RIA assets soared nearly 30% there last year

Theories for what's driving the growth spurt abound, but it surpassed all other regions of the country.

8 apps advisers love for getting stuff done

We reached out to advisers to find out which apps they are using to run their business more efficiently.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print