Some policy experts were pleasantly surprised with the US Treasury’s proposals to reform Dodd-Frank, considering them to be thoughtful, and are billing them as a likely road map for the future of the US financial system. By Justin Pugsley.
What's happening?
US Treasury secretary Steven Mnuchin delivered his review of Dodd-Frank with a raft of proposals on how to improve it.
The report cleverly acknowledged US president Donald Trump’s strident ‘America first’ rhetoric, threw in some surprising twists on rearranging the US’s regulatory furniture while supporting global regulatory frameworks, such as the Basel accords, but with caveats.
It also looks like a more realistic blueprint for US financial regulatory reform than the Financial Choice (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act drafted by Jeb Hensarling, chairman of the House financial services committee. It was recently passed by the House of Representatives, but is widely expected to flounder in the Senate due to stiff Democrat resistance.
Mr Mnuchin’s approach, on the other hand, tries to bypass the Senate as much as possible, instead relying on the heads of the regulatory agencies and executive orders to drive through the Republican reform agenda.
Indeed, he is confident he can get 70% to 80% of it enacted by this route, though policy experts think that in reality it will be less than that – but it will still have a big impact.
Why is it happening?
Mr Trump claims Dodd-Frank is killing banking, stifling credit creation and holding back the economy, meaning it should be repealed. He told Mr Mnuchin to fix it.
Mr Mnuchin, however, is not trying to repeal Dodd-Frank, but rather tweak it with some interesting changes. For example, the hardline free-market Republicans despise the Financial Stability Oversight Council, with its powers to designate certain financial firms as systemically important.
Mr Mnuchin, who chairs it as Treasury secretary, would have it play a bigger coordination role over which regulatory agency does what, and would have the power to select a lead agency when inter-regulatory disputes arose. This would be another lever to drive home Republican reforms.
As for the other Republican bête noire, the Consumer Financial Protection Bureau (CFPB), Mr Mnuchin would significantly defang it, making it less powerful and more accountable. In terms of supranational standard setting bodies, such as the Basel Committee on Banking Supervision, Mr Mnuchin also wants them to be more transparent, engaged with industry and accountable. Could governance changes be in the pipeline for these bodies?
What do the bankers say?
The banks really like it – not that they are saying too much about it publicly. However, the various trade associations and lobby groups that represent the industry are enthusiastic. Naturally, the Democrats see it as pandering to Wall Street, another sign that it is probably good for banks.
The banks prefer it to Mr Hensarling’s Financial Choice Act, which would junk big slices of Dodd-Frank that banks have spent billions of dollars complying with. The Treasury’s approach, instead, is to relax many of these measures – such as the Volcker rule, which bans certain forms of proprietary trading by banks. It would also streamline stress testing.
Like the Choice Act, the Treasury’s report envisages banks being able to opt out of much of Dodd-Frank altogether providing they have loads of capital on their balance sheets. That might work for some smaller banks, but is not particularly useful for the giant US global banks, as the savings on compliance would not offset the required capital levels.
Will it provide the incentives?
Dodd-Frank was rushed out in response to the 2007-09 financial crisis and, unsurprisingly, many parts are overly complex and burdensome. It definitely needs some rethinking to make it easier to apply and less confusing.
Much of what the Treasury is trying to do is to simplify the rules: either by raising thresholds so smaller banks are excluded from parts of them or by giving greater supervisory discretion on interpretation. In some cases, it is down to redrafting.
However, it is not designed to allow banks to do whatever they please. There’s still an emphasis on maintaining high levels of capital and good compliance, which the Republicans support. Now it remains to be seen how much of it will actually get applied. A lot depends on the heads of the regulatory agencies Mr Trump appoints over the next few years.
It will also be down to reaching compromises with the Democrats, who have reason to engage or they could lose influence over the reform process. For instance, Mr Trump could in theory paralyse the CFPB by appointing a chief who does little work, effectively leaving a Democrat-created agency neutralised with diminished consumer protection as a result.
