The Washington PostDemocracy Dies in Darkness

8 questions about the future of banking regulation under Trump

(Mark Lennihan/AP)
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One of President Obama’s signature pieces of legislation — the Dodd-Frank Act — is threatened by Republicans’ sweep of Washington. Passed largely along party lines in 2010, Dodd-Frank tightened the rules governing the financial sector. It has since been attacked relentlessly by House Republicans, who believe the legislation went too far and that its regulations have slowed the recovery.

President-elect Donald Trump has mentioned Dodd-Frank only briefly, saying he wants major changes. Investors clearly think this is a done deal. As of this writing, the stock prices of Goldman Sachs and JP Morgan, for instance, are up about 15 percent since Election Day.

But major changes to Dodd-Frank will have to overcome some major political hurdles.

1. What does Trump want?

No one knows. Occasionally during the campaign, usually when asked a direct question, Trump briefly mentioned the need to make major changes to Dodd-Frank to free up bank lending. Post-election, Trump’s website said: “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” Trump appointed Paul Atkins, a former Republican SEC commissioner and deregulation advocate, to lead the team.

But Trump said other things about the banks as well. During the campaign, Trump criticized Hilary Clinton’s close connections to Wall Street, saying that she was “owned” and “controlled” by the big banks. Before the election, Trump’s website said, “It’s time for a 21st Century Glass-Steagall,” referring to the 1930s law that kept commercial and investment banking separate.

Trump’s representatives insisted that this commitment be included in the Republican Party platform. However, Trump’s websites no longer mention Glass-Steagall.

2. What do Republicans want?

House Republicans introduced dozens of bills to repeal large parts, if not all, of the Dodd-Frank Act. They have held oversight hearings to criticize regulators for overreach and refused to approve appointments of top regulators. They’ve stopped increases to the budgets of the Securities and Exchange Commission and the Commodities Futures Trading Commission, which has hampered their ability to develop Dodd-Frank’s mandated rules. And they’ve required studies of the cost of regulatory compliance.

The key changes Republicans want are in the Financial CHOICE Act, drafted by Rep. Jeb Hensarling (R-Tex.), chair of the House Financial Services Committee. In September, the committee passed that bill largely along party lines. The act would gut Dodd-Frank in a variety of ways, including reducing the number of banks covered by its supervision; ending the special resolution mechanism, gutting the powers of the Consumer Financial Protection Bureau; forcing all regulatory agencies to be funded specifically by congressional appropriations; requiring detailed cost-benefit analysis of proposed regulations; and repealing the Volcker Rule, which prohibits proprietary trading and places severe limits on investments in hedge funds and private equity funds.

Hensarling told Morning Consult that Vice President-elect Mike Pence is “very enthusiastic about [the bill],” as are other Trump advisers. Hensarling may be appointed Treasury secretary.

Republicans want big changes, but change is hard in American politics. The separation of powers, a fragmented regulatory structure and industry disagreements often favor the status quo. The toughest bargaining to bring about Dodd-Frank took place in the Senate, and the biggest battles to defang it will take place there as well. It helps Republicans that financial regulation entails highly complex issues that normally attract little public attention. As political scientist Pepper Culpepper has argued, the finance industry can use “quiet power” during periods of low public attention to weaken regulations introduced in a blaze of publicity.

Republicans hold 51 seats in the incoming Senate (probably 52 after the Louisiana run-off election), short of the 60 votes needed to pass major legislative reforms like the Financial CHOICE Act (assuming that Democrats would filibuster to preserve it).

3. Would any Democrats vote to weaken Dodd-Frank?

That’s hard to imagine. Of the 10 Democratic senators up for reelection in states that voted for Trump, coming election dynamics make it unprofitable for them cross the aisle. Six of these states supported Sanders in the Democratic primary and the senators in the other four states voted for Dodd-Frank. Meanwhile, Sen. Elizabeth Warren (D-Mass.) is deeply committed to strong financial regulation, and will fight hard to keep the Democrats unified behind it.

4. What about the “nuclear option,” or eliminating the Senate filibuster and thereby making it possible to pass bills with a simple majority?

This is why Senate Republicans might (not) go nuclear

Neither party really wants to eliminate this powerful tool for the minority. It’s unlikely that Republicans would go nuclear to kill Dodd-Frank – but they may do so for another issue (say, confirming Supreme Court justices or passing tax cuts), potentially enabling them to repeal Dodd-Frank.

5. Would all Senate Republicans vote to gut the act?

Sen. Susan Collins (R-Maine) voted for Dodd-Frank in 2010; she is unlikely to support gutting it. Large banks remain deeply unpopular; Republican senators from swing states may be reluctant to help the likes of Goldman Sachs and Wells Fargo. And after all, while the act passed along party lines, many of its important elements had bipartisan support. After the crash of the housing market in 2008, even many Republicans felt that financial deregulation had gone too far.

6. Would the public tolerate weakened financial regulations?

A 2016 poll finds strong public support for tough oversight and regulation of the financial sector. The recent scandal at Wells Fargo shows how quickly the public can re-engage. Any future scandals would undermine efforts to kill it.

But while big banks remain unpopular, there is broad support for small banks. Community banks are very influential in Washington; their members are active in all congressional districts, far more so than are local managers of big banks. Small banks portray themselves as small businesses that were innocent victims of the financial crisis, that are crucial to economic growth and that don’t threaten the financial system’s stability. Small banks want to spend less time complying with federal requirements. That could be done by increasing the amount of assets needed to trigger Dodd-Frank’s tougher regulations. Bipartisan legislation on this might pass.

7. Could regulators just stop regulating?

The act required regulators to issue roughly 400 new rules. Roughly 115 rules either haven’t yet been proposed or aren’t yet finalized.

In August, Trump called for a moratorium on new regulations, though it is unclear whether the president has the authority to prevent independent regulatory bodies from issuing regulations. But even if he can, a presidential order may not be able to stop regulations mandated by law.

8. Could new leaders undermine enforcement?

Trump will be appointing new heads of the SEC and the CFTC. He’s expected to appoint new members of the Federal Reserve Board of Governors. Dodd-Frank created the post of vice chair of supervision at the Federal Reserve, which oversees the largest banks. While officially vacant, the position has effectively been held by Daniel Tarullo, a regulatory champion. Trump will probably appoint someone bank-friendly to this post.

Republicans strongly dislike Richard Cordray, head of the CFPB until 2018. However, Dodd-Frank specifies that the director can only be replaced for “cause,” although that requirement was struck down by the D.C. Circuit Court of Appeals. This provides an opening for his quick removal.

Is the Consumer Financial Protection Bureau constitutional? The D.C. Circuit says no. Here’s why.

So yes, changes to the Dodd-Frank regulatory regime are coming. Those changes might not be as broad or come as speedily as investors expect and many Republicans want. A key determinant will be the ability of Democrats to keep the issue relevant with the public. Crafting the Dodd-Frank Act took plenty of political skill and compromise; unwinding it will be just as hard.

Brent A. Sutton is a PhD candidate in political science at the University of British Columbia and retired partner and vice president at Phillips, Hager & North Investment Management (now part of the Royal Bank of Canada).