Last month, we explored the process President Donald Trump’s administration would need to follow to deliver on his campaign promise of repealing the Dodd-Frank Act. As discussed, Trump’s early efforts to “deconstruct the administrative state” have focused on regulatory reform via executive order. However, dismantling or even weakening Dodd-Frank is not as simple as signing an executive order. A full-scale repeal of Dodd-Frank would require Congressional action and a replacement plan, which could take years to finalize.
Let’s now turn our focus to proposed Congressional legislation designed to shut down the federal rules process that could come into play regarding the repeal, as well as the replacement and enforcement options at the administration’s disposal.
Ideology and Execution
While we’ve established that procedural challenges are likely to be the largest impediment to the Dodd-Frank repeal process, it’s critical to underscore the ideological divide likely to come into play. This divide is exemplified by two obscure statute proposals from House Republicans that would virtually shut down the Federal rulemaking process.
First, the Regulations from the Executive in Need of Scrutiny Act of 2017 (REINS Act), which passed the House in early January, has severe restrictions. The Act prohibits an agency from issuing a new regulation unless it amended or repealed some other rule(s). Second, the Regulatory Accountability Act of 2017 (RAA), which passed the House in January 2017, gratuitously over-complicates and overloads the rulemaking process with so many additional preliminary procedural requirements that it effectively clogs the process to a halt.
Rules designed to inhibit the new regulation may theoretically align with Trump’s campaign promises, but if they pass, they would create an even narrower path to repealing and replacing Dodd-Frank. With the banking industry already in compliance with large portions of Dodd-Frank, a wholesale repeal would be an incredibly complicated prospect. On the flipside of that coin, the anti-regulatory ideology espoused by REINS and RAA may further complicate Trump’s attempts to replace the act with something palatable to its critics.
Weighing Replacement Options
As I pointed out in my last blog, while there are two paths rules and regulation can take to enactment, the formal process (which requires a congressional hearing on the record and the blessing of a panel of judges) is used far less than the informal process. Historically, Congress has relied on the informal process in order to leave detailed regulatory implementation to the executive branch. The general belief has been that administrative agencies can address public policy issues with greater expertise. Furthermore, it tends to be easier for agencies to respond flexibly through new regulations than it is for Congress to write new statutes. This process for crafting and issuing rules is arguably more painstaking, more transparent, and more accountable than the ordinary legislative process itself. It also requires a replacement plan.
The impetus for the repeal and replacement of Dodd-Frank is the “fiscal burden” that it’s placed on the American economy. According to the Financial Services Committee, the Act has cost the country roughly $30 billion; $27 billion stemming from the strain it places directly on the economy and another $3 billion associated with the 2,600 new full-time Federal employees hired to implement the Act’s 400-plus regulatory mandates.
That being said, there are two leading candidates for filling the void left by a successful repeal of the Dodd-Frank Act. Both are designed to reduce the regulatory burden required of banks by increasing the ratio of assets they have on hand. In this way, they would address the cause of the 2007 financial collapse, but free banks from regulatory spending which could be repurposed to hire and expand.
Option One: The Financial Choice Act
House Financial Services Committee Chair Jeb Hensarling (R-TX) offers the Financial Choice Act (aka CHOICE Act), which is designed to enhance U.S. financial market resiliency while promoting economic growth by offering well-managed, well-capitalized financial institutions —those with a simple leverage ratio of 10 percent —an “off ramp” from Dodd-Frank’s regulatory complexity.
The Act takes on the “excessive regulatory complexity” embodied by the Dodd-Frank Act, the Basel capital accords, and other post-crisis regulatory initiatives, which it says produces a less resilient financial system, while cementing the competitive advantages enjoyed by “too big to fail” firms and harming economic growth.
The massively less-complex attractiveness of the CHOICE Act is offset by the extraordinary capital standards expressed through the relatively high 10% leverage ratio—considered a “blunt” measurement of a bank’s capital against total assets. Despite passage in the House, this critical element of the CHOICE Act is unlikely to gain a 60-vote majority in the Senate.
Option Two: The Minneapolis Plan
Alternatively, the Minneapolis Plan proposed by Minneapolis Federal Bank Governor Neel Kaskari proscribes a flat 23.5% equity capital buffer (equating to 15% leverage ratio) to avoid a “once in a 100-year” banking crisis, which the BIS says costs the economy 158% of its GDP.
According to the #EndingTBTF website, the plan will:
- Increase the minimum capital requirements for “covered banks” to 23.5 percent of risk-weighted assets
- Force covered banks to be no longer systemically important—as judged by the U.S. Treasury Secretary—or face a systemic risk charge (SRC), bringing their total capital up to a maximum of 38 percent over time
- Impose a tax on the borrowings of shadow banks with assets over $50 billion of 1.2 percent for entities not considered systemically important by the Treasury Secretary and 2.2 percent for shadow banks that are systemically important
- Create a much simpler and less burdensome supervisory and regulatory regime for community banks.
Similar to the Choice ACT, this would reduce the regulatory complexities of Dodd-Frank accused of hurting smaller banking establishments.
Option Three: Feeble Enforcement
While it may lack showmanship, another alternative to repealing Dodd-Frank at the Trump administration’s disposal is simply declining to enforce existing rules. Budget cuts and personnel changes specifically targeting the departments that enforce Dodd-Frank would be one way to accomplish this. As an added bonus, feeble enforcement is harder for courts and the opposition to counter than formal deregulation.
Regardless of which replacement the administration selects, the Congressional cooperation required to accomplish his regulator agenda requires Trump to stay in the good graces of his Republican colleagues. With the specter of the Obamacare repeal still looming over Congress, this, too, may be easier said than done.
Read the first article of this series: How to Dismantle Dodd-Frank: The Challenges