The future of US financial regulatory reform in the Trump era
Under the Trump Administration, many changes are in the air. Our prediction is that the post-financial crisis paradigm shift in financial regulation is here to stay. There will be a rebalancing of regulatory and supervisory goals away from a sole focus on financial stability to thinking about jobs and economic growth as well, but we do not expect to see a wholesale dismantling of the Dodd-Frank Act.
More than a week after the inauguration, the short-term outlook for US financial regulatory reform is not much clearer than it was in November for a number of reasons, including that financial regulatory reform is not at the top of the President’s agenda and that very few nominations for the financial regulatory posts have occurred. During the campaign, President Trump called for the “dismantling” of the Dodd-Frank Act while also voicing support for the restoration of an updated version of the Glass-Steagall Act. But financial regulatory reform is not even part of the Trump Administration’s White House website, while trade, immigration, and Obamacare are.
Financial regulatory reform is likely, however, to be a priority for Congressional Republicans, who have held the House of Representatives for six years but have not had unified control of Congress and the Presidency for a decade. Time out of power has given them ample opportunity to develop their own ideas for financial reform legislation. Many of the bills introduced in or passed by the House in recent years are messaging legislation—meant to stake out political positions, not to become law—but even these signal House Republicans’ willingness to consider far-ranging proposals, from changing how the Federal Reserve sets monetary policy to allowing banking organizations to opt out of enhanced prudential regulation in exchange for higher capital requirements. To understand the scope of the reforms currently on the table, it is worth considering the Financial CHOICE Act, an omnibus reform bill introduced by House Financial Services Committee Chairman Jeb Hensarling and described in detail. In the next few weeks, Rep. Hensarling is expected to release CHOICE Act 2.0, which may be more ambitious in certain aspects while scaling back some controversial proposals in an effort to win needed support in the Senate.
The key to financial regulatory reform, and the primary obstacle for Republican efforts, remains the Senate. Although Republicans hold 52 of 100 seats in that House, the filibuster enables a minority of only 41 Senators to block most new legislation. So long as the Senate keeps the filibuster and Republicans do not have a filibuster-proof Senate supermajority, we are not sanguine about the prospects of dramatic financial regulatory reform.
We do not, however, think that the currently narrow Republican majority in the Senate will be fatal for financial regulatory reform. Instead, the possibility of the filibuster may channel financial regulatory reform towards a consensus rebalancing of the Dodd-Frank paradigm shift. Many Democratic senators remain centrists, and ten Democrats will be seeking re-election in 2018 from states that voted for President Trump. Notwithstanding pressures for intraparty cohesion, these senators may feel the need to show that they can work across the aisle and with the President to craft bipartisan compromise legislation. In the context of financial regulatory reform, we expect this will lead to compromise legislation that leaves much of the Dodd-Frank Act intact but softens some of the Act’s most onerous
The key to financial regulatory reform, and the primary obstacle for Republican efforts, remains the Senate.
Finding opportunities for bipartisan consensus will require careful, evidence-driven reassessment of what the Dodd-Frank Act has accomplished, as well as its costs. Regulators have for too long pursued a single-minded focus on financial stability. With the change in Administration, the time is ripe for Congress and regulators to adopt a more balanced approach that considers not only stability, but also how regulations, individually and in the aggregate, affect investment, bank lending, market liquidity, community banks, and ultimately economic growth and job creation. By assessing both what the Dodd-Frank Act has done right and where it went wrong, policymakers can spot the low-hanging fruit for financial regulatory reform—laws and regulations that generate high costs while offering few to no corresponding benefits.
That such a reconsideration of the Dodd-Frank Act and its regulations is needed should not be surprising. We have, starting in 2008, lived through almost nine years of a financial regulatory shift. The Dodd-Frank Act required financial regulatory agencies to make nearly 400 new regulations, and since 2010, those agencies have rolled out new regulations at a breakneck pace, filling more than 25,000 pages of the Federal Register with proposed and final rules. This rush to issue new regulations, mandated by the Dodd-Frank Act’s impossible statutory deadlines, left little time to fine-tune regulations before they were released or to assess their market impacts afterwards, let alone to consider how previously enacted laws and regulations (such as the Sarbanes-Oxley Act) may have reduced market liquidity or made companies less likely to list securities on US public markets. Now that Dodd-Frank-mandated rulemaking is largely complete—only one fifth of the Act’s mandates have yet to be addressed by a proposed or final rule—it is time for policymakers to pause, to rebalance their approach to financial regulation, and to take stock of which regulations work and which do not.