Trump vision of Dodd-Frank rollback moribund, but his regulators will chip away

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By Neil Roland. First published on MLex Financial Services 20 July 2017.

Six months into the Trump administration, the president and his congressional supporters are far from achieving their goal of a sweeping reversal of the post-crisis financial legislation that has vexed the banking industry. They likely won't succeed.

But regulators appointed by Donald Trump have already started chipping away at Dodd-Frank Act rules, an effort due to pick up steam next year after Federal Reserve Chairman Janet Yellen and Consumer Financial Protection Bureau Director Richard Cordray step down.

While the Obama-era regulatory edifice aimed at preventing another crisis likely won't be toppled, it will emerge pockmarked, experts agree.

"With partisan gridlock on the Hill and a president that is not engaged in the legislative process, the policy action has definitely shifted to the regulatory side," said James Thurber, an American University political science professor.

"We will see a slew of Trump appointees doing whatever they can to undermine regulation," said Norm Ornstein, a congressional scholar at the American Enterprise Institute, a conservative Washington think tank.

Thursday marks the six-month anniversary of Trump's inauguration, and it's not just the Dodd-Frank rollback that has stalled in Congress. His signature effort to undo Obamacare hasn't garnered enough Senate Republican support to come to a vote.

Still, Trump hasn't wavered from his campaign statement that changes he wanted would "be close to dismantling of Dodd-Frank."

Congressional point man

After the election, Trump found a congressional point man in House Financial Services Committee Chairman Jeb Hensarling. The Texas Republican's consultations with industry led to a nearly 600-page bill rolling back much of Dodd-Frank.

This legislation, which passed the House, would repeal the Volcker Rule, weaken the CFPB and forbid the Financial Stability Oversight Council from subjecting large insurers and other nonbanks to heightened federal oversight.

But it has been greeted coolly by Senate Republican leaders who anticipate staunch Democratic opposition. The bill would need to attract eight Democratic votes, a virtually impossible order in the polarized Congress.

House Republicans are trying an end-around in which they tacked some of the provisions of Hensarling's bill onto spending legislation, but that too is likely to run into Senate roadblocks.

Even a policy on which there's bipartisan consensus — regulatory relief for community banks — has fared no better. Republican leaders have ignored Democratic requests to detach this relief from the floundering legislation and put it in a separate bill.

Regulatory arena

That shifts the spotlight to the regulatory arena, where the effort has been led by Treasury Secretary Steven Mnuchin.

Trump has been slow to appoint federal regulators. But those he has named have been moving with dispatch.

In May, top financial regulators led by Mnuchin began a Financial Stability Oversight Council review of the Volcker Rule, which bars federally insured banks from making market bets with their own money.

The interim head of the Office of the Comptroller of the Currency, Keith Noreika, said this week that his agency plans to seek public input on how to change the rule. Some other agencies are likely to follow suit, he said.

FSOC plans to meet again July 28 to get an update on this review.

Fed changes

Any Volcker Rule modifications won't happen quickly.

Five agencies jointly approved the complex 2013 rule, but only three have permanent chairmen at this point. And one of them, Yellen, is an Obama holdover who has said she is open to modification but will likely resist wholesale changes.

Trump eventually will secure Senate confirmation for heads of the OCC and the Federal Deposit Insurance Corporation.

And when Yellen's term expires next February, the president will have an opportunity to name a replacement to head the most important US banking regulator.

In the meantime, Trump recently appointed Randal Quarles, a former Treasury undersecretary under President George W. Bush, to be the Fed's first regulatory czar.

Quarles wrote in an article last year that "the consequence of a dramatic increase in bank capital is an increase in the cost of bank credit, meaning higher interest rates across the board."

For the next six months, he will likely be stymied within the Fed on dramatic deregulatory steps.

But once Yellen is replaced, most of the important pieces on the Trump regulatory chessboard should be in place, and the long-promised assault on Obama-era financial regulations can begin in earnest.