Insights and News /

16 March 2017

Donald Trump, Dodd-Frank, and the chopping block

On February 3rd 2017, Donald Trump signed an executive order to review the Dodd-Frank Act (“DFA”), with the goal of repealing aspects of the regulation implemented following the 2008 financial crisis. Trump has asked Treasury Secretary Steven Mnuchin to perform an audit and submit recommendations for repeal or reform.  

Trump has notoriously called the DFA a “disaster”, citing heavy burdens on community banks and the decrease in lending to consumers and small businesses. The industry has also struggled to react to the thousands of requirements which impact virtually every function, from relationship set-up (KYC/On-boarding) to operations, costing millions of dollars in compliance and on-going monitoring.  

It seems inconceivable that the DFA will be repealed , as much of the act has already been implemented. There is a broad consensus that the US financial system is now safer, more transparent, and less risky. Further, several key DFA-related rules, such as those for capital planning and stress testing, have been developed and administered largely by the Federal Reserve which is independent of the US Treasury and thus outside the control of the Trump administration.

However, following the announcement of the executive order, global financial services stocks soared, which many see as the market’s approbation of the rollback attempt. It is reasonable to expect significant change to those areas the administration can influence more directly, especially if they focus on direct engagement with the regulator rather than statutory change. The big question is, what will stay and what will go? We predict that the following aspects are likely to be most heavily impacted:

  • The Volcker Rule – Requirements which establish limits on proprietary trading in order to prevent deposit-taking banks from taking on too much risk, which has caused significant operational costs to comply. A Fed report in December 2016 found that the rule had a harmful effect on corporate bond liquidity, making firms less likely to provide liquidity during stress, an unintended consequence.[1] Repeal would have profound implications, especially given its global impact.Unwinding the existing controls infrastructure would not be an easy exercise
  • Consumer Financial Protection Bureau (“CFPB”) - One of the most contentious bureaus since inception given its wide purview and authority. The Trump administration may eliminate the CFPB altogether and return oversight to other regulators, or at the very least, overhaul the bureau’s structure in an effort to reduce perceived overlap of authority
  • Financial Stability Oversight Council (“FSOC”)Given the authority to designate which banks (and non-banks) could pose a systemic risk to the financial system. Some firms have fought this designation and the additional oversight that comes with this classification. Opponents argue that costly regulations focused on “too big to fail” have created a silent problem of “too small to succeed”, wherein small banks are forced to add staff and complexity for the sake of compliance
  • “Living Wills” – Requiring large financial institutions to write plans to show regulators how their operations would run down in the event of another crisis. In 2015, eight large bank’s resolution plans were cited for shortcomings and deemed not credible enough.

These are important issues which deserve serious debate. We are concerned, for example, when attempts to limit the central bank’s powers as lender of last resort are driven only by the “too big to fail” problem, while neglecting the beneficial effects of that power in stopping contagion during a crisis –. However, it would be prudent for firms to begin considering the implications of repeal on their business models and control frameworks.

We expect US commitments regarding capital and liquidity to be fulfilled. These include, among other things, the implementation of FRTB by 2019. Breaking an existing commitment would be a highly unusual (unprecedented even) violation of charter obligations and have serious ramifications for future international regulatory cooperation. While it is still too early to draw firm conclusions, we will continue to follow this topic and provide insight on how you should prepare.