The Dodd-Frank Rohrschach Test: Repeal, Rollback, or Reinforcement?

When asked whether the Dodd-Frank rollback bill would reduce the Fed’s ability to supervise large foreign banks, Jerome Powell, Chairman of the Federal Reserve, said, “It does not, according to my reading of the text.” Powell’s statement is emblematic of the ambiguous meaning of the Dodd-Frank rollback, reactions to which reveal it as a veritable Rohrschach test of political, legal, and economic beliefs and interests. Arguably, the Dodd-Frank rollback passed Congress with bipartisan support because both supporters and opponents can now view (and frame) the rollback in positive terms.

On May 24, President Trump signed the bipartisan Dodd-Frank rollback bill, marking a significant milestone for the administration, a partial victory for advocates of financial deregulation (or, more tendentiously, “right-sizing”), and, for others, a worrisome loosening of prudential oversight. Some of the headline elements of the rollback bill include: (i) an increase  of the asset threshold (from $50 billion to $250 billion) at which banking institutions are subject to certain enhanced supervision and prudential standards, (ii) eliminating the Volcker rule for banks with assets less than $10 billion, and (iii) simplifying and reducing certain capital, liquidity, and reporting requirements.

Supporters of the rollback have touted these elements as a victory for small to mid-size regional and community banks that will have clear economic benefits for the communities they serve. Many supporters of the rollback, who have long been opposed to Dodd-Frank, express the view that the law went too far to begin with, imposed onerous requirements on institutions that were victims (not perpetrators)of the 2007 financial crisis, and has unnaturally constrained the salutary lending activities of the banking industry. Other supporters of the rollback, who had previously been proponents of Dodd-Frank, maintain that the regulatory relief to smaller institutions brought about by the rollback has, counterintuitively, strengthened Dodd-Frank for the long term by removing the features that made the law a political punching bag in the short term.

For those who have studied the complex relationship of political interests and economic forces to financial crises—whether as precursors or responses to financial crises (and then as backlashes to those responses)—the Dodd-Frank rollback broadly fits a cyclical pattern. In good economic times, prudential oversight of the financial sector wanes as memories of the last crisis fade. In pursuit of profits, untrammeled by restrictive oversight, economic agents take on risk. A crisis ensues. Legislators and regulators respond energetically by imposing fresh restrictions. Wash, rinse, repeat.

It is a dual paradox that in this instance a significant deregulatory measure enjoys the support of those who opposed Dodd-Frank and those who supported Dodd-Frank, while incurring the disfavor both of those who think the rollback doesn’t do enough and those who think it does too much.