Banking & Financial Services
By John M. Pachkowski, J.D.
With an unconventional campaign that resulted in the election of [Donald J.] Trump, along with Republican control of Congress, the stage is set to bring about changes in regulation of the banking and financial services industries.
On the campaign trail, as he secured the delegates needed to become the Republican nominee, Trump called the reforms in the Dodd-Frank Act harmful to the economy and said he planned to overhaul Dodd-Frank. In an August 2016 speech before the Detroit Economic Club, he called for a temporary moratorium on new agency regulations and stated that every federal agency will be required to prepare a list of all of the regulations that are “not necessary, do not improve public safety, and which needlessly kill jobs.”
Dodd-Frank Act
After winning the presidential election, the Financial Services Policy Implementation team, which is part of the Trump presidential transition, said the “Dodd-Frank economy does not work for working people.” The team added it will be working “to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” Steven Mnuchin, the nominee for Treasury Secretary, said the incoming Trump Administration will strip back parts of Dodd-Frank that prevent banks from lending.
Total repeal
Although Republicans control both houses of Congress, the entirety of the Dodd-Frank Act will probably not be repealed once the Trump Administration takes office. Total repeal on “Day 1” probably will not occur due to the small majority the Republicans hold in the Senate. For any legislation to move forward, roughly eight or nine Democrat senators will need to side with the Republican senators. It is possible that Senate Majority Leader Mitch McConnell (R-Ky) could remove the 60-vote cloture rule for legislation to move forward, but he is also deemed to be an “institutionalist” and may retain the cloture rule.
However, total repeal of Dodd-Frank maybe a possibility following the 2018 mid-term elections. At that point in time, Democrats will have to defend 25 of the 33 seats being contested.
Roll back of Dodd-Frank
Rolling back provisions of the Dodd-Frank Act maybe more feasible. Legislation introduced by Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee in the 114th Congress, could be used as a template. The Financial CHOICE Act, which Hensarling labeled a “new legislative paradigm” for banking and the capital markets, would allow strongly capitalized banks to opt out of burdensome regulations, end too-big-to-fail, and impose greater accountability on regulatory agencies. The plan also would repeal Dodd-Frank’s controversial Volcker Rule.
Other provisions of the Financial CHOICE Act would: incorporate a new “bankruptcy not bailout” chapter into the Bankruptcy Code so that a large financial institution that takes on unsustainable risks could fail without disrupting the financial system; require cost-benefit tests of new regulations; convert financial regulatory agencies now headed by single directors, such as the Office of the Comptroller of the Currency, into bipartisan commissions; and require that the Federal Reserve Board “describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment” of its policy instruments.
A precursor to the roll back or repeal of the Dodd-Frank Act once Republicans take control of the White House and Congress occurred late in the 114th Congress. The House of Representatives approved H.R. 6392, the Systemic Risk Designation Improvement Act of 2016. The legislation would have specified when bank holding companies may be subject to certain enhanced supervision by the Federal Reserve Board. Among other things, the bill would have replaced the $50 billion asset threshold with business activity standards to determine an institution’s systemic risk.
What the industry is saying
Recently, in an investor presentation, JPMorgan Chase’s James Dimon remarked that “We’re not asking for wholesale throwing out Dodd-Frank.” Also, John Gerspach of Citigroup Inc. added, “The first thing I would ask for is nothing new, no new rules. If you haven’t figured out yet how all the existing rules work together, don’t put on anything else.”
Fate of CFPB
Since its inception, Republican lawmakers have sought to abolish or diminish the role of the Consumer Financial Bureau; in fact the 2016, Republican platform called the CFPB a “rogue agency” with a director exercising “dictatorial powers unique in the American Republic.” Republican lawmakers have consistently sought to replace the single directorship with a commission and to make the bureau subject to normal congressional appropriations process.
The October 2106 case of PHH Corporation v. Consumer Financial Protection Bureau called into question the constitutionality of the bureau’s structure, with the U.S. Circuit Court of Appeals for the District of Columbia “remedying” the constitutional deficiency by placing the CFPB under the Executive Branch, thereby allowing the President to
dismiss the director at will.
This ruling in the PHH case could allow President Trump to dismiss the current director, Richard Cordray, and replace him with a person that would take a less vigorous approach to enforcement of consumer financial laws. Since the CFPB has filed a petition for the full appeals court to rehear the case, it might be unlikely that Trump would dismiss Cordray until the case is fully resolved, which may include an appeal to the U.S. Supreme Court. Depending upon how the full court of appeals rules in the PHH case, since CFPB may have a difficult time with an appeal to the Supreme Court since the bureau is required to seek concurrence from the U.S. Attorney General, who under the Trump Administration, would be Jeff Sessions, currently A U.S. Senator from Alabama. Without the Attorney General’s concurrence, the Trump administration effectively blocks the CFPB's decision to appeal to the Supreme Court.
On the other hand, if Trump does succeed in removing Cordray in favor of a person less inclined to pursue enforcement actions, it is conceivable that states such as California, Illinois, Massachusetts, and New York, which all have Democrats as attorneys general,
could fill any void left by the CFPB’s inaction.
Staffing of agencies
Even if Congress is not successful in making changes to the Dodd-Frank Act, the incoming president’s appointments to various independent financial regulatory agencies could, as noted by Justin Schardin, director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative, provide “wide latitude to reinterpret or roll back new rules and regulations.”
Although some of the agencies may be headed up by members that could reinterpret or roll back regulations, any type of action would still need to go through the normal proposal and comment process.
It was also observed with the various agency appointments that the role of the Financial Stability Oversight Council could change, with the new Treasury Secretary using FSOC’s statutory mandate as a means for coordinating regulators to streamline existing regulations.
Housing finance reform
As the conservatorships of Fannie Mae and Freddie Mac begin their ninth year, Congress may address housing finance reform. The last time Congress attempted to tackle the issue was in 2013 and 2014. It expected that Sen. Mike Crapo (R-Idaho) will assume the chairmanship of the Senate Banking Committee. He was one of the senators who drafted legislation that passed the committee on a bipartisan vote in 2014.
Capital and liquidity
To address the causes and effects of the global financial crisis, the Basel Committee on Banking Supervision established the Basel III capital framework which set higher levels for capital requirements and introduced new global liquidity requirements.
The U.S. bank regulatory agencies have implemented most of the Basel III capital and liquidity requirements, and banks, depending on their size, have been complying with the new capital and liquidity requirements.
Banks have argued these various requirements have hampered lending, and other stakeholders have contended that these requirements have put U.S. banks at a competitive disadvantage on the world stage. Some have called for the U.S. not to adhere to these international standards, since other countries seek “capital neutrality.” The Vice Chairman of the Federal Deposit Insurance Corporation, Thomas M. Hoenig, cautioned, “The United States should not follow this path nor allow its capital mandates to be compromised in this fashion.”
For more information about the impact of the election on the banking and financial services industry, subscribe to the Banking and Finance Law Daily.
