Anything more than a tweak to Dodd-Frank would be riskyby George Magnus / February 13, 2017 / Leave a comment
Around nine years ago, the US investment bank Bear Stearns was in trouble, finding increasing reluctance on the part of markets to provide the liquidity it needed to continue operations. In March 2008 the Federal Reserve intervened heavily to give the bank a lifeline. Two months later, the bank was no more, sold for a song to JP Morgan Chase. With the Lehman crisis four months away, the rest, as they say, is history.
Yet 10 days ago, President Donald Trump issued an executive order which instructs his yet-to-be-confirmed Treasury Secretary and US financial sector regulators to report in June about whether and how to undo the significant parts of that history that have to do with banking regulation. Trump’s executive order doesn’t refer to the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act by name but this is what is in the Trump Administration’s cross-hairs. Trying to unpick it is the finance sector equivalent of undoing Obamacare.
It’s worth pointing out that Trump, himself, can’t change finance sector regulation. Only Congress can do that, including the Senate where the Republicans have a 52:48 majority, and need 60 votes to avoid a “filibuster,” or lengthy and sometimes permanent delay. Getting enough Democrats to support financial deregulation is going to be hard, if not impossible. But Republicans are going to give it a try, as Trump directs his investment banker poachers-turned-gamekeepers, such as Gary Cohn, Chief Economic Adviser, Steve Mnuchin, Treasury Secretary nominee, and White House Chief Strategist Steve Bannon.
Dodd-Frank was a creature of its time. It subjects banks to higher capital and liquidity requirements, and banks are now much better resourced and structured. It requires the 34 banks that qualify as SIFIs (or systemically important financial institutions, according to asset size) to be stringently stress-tested. It set up a Financial Stability Oversight Council as a mechanism to wind down large failing financial service companies, banned banks from proprietary trading (the so-called Volcker rule), and introduced a raft of consumer protection reforms under the auspices of the Consumer Finance Protection Bureau.
Critics complain that Dodd-Frank is unwieldy, providing 400 rules in a law that extends to 848 pages, that it represents government over-reach in the extreme, and that smaller…