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2017-02-14 11:25:53
Donald Trump starts a long struggle to overhaul the Dodd-Frank act
AT FIRST blush, there is little to be excited about. The eighth executive order
of Donald Trump s infant presidency, signed on February 3rd, lists seven core
principles for regulating America s financial system. These include the
prevention of bail-outs by taxpayers; advancing the American interest in
international negotiations; and tidying the unruly thatch of federal
regulation. The treasury secretary and regulators must report by early June on
how well existing laws fit the bill. There is little in the actual executive
order that the Obama administration would have disagreed with, says Doug
Elliott of Oliver Wyman, a consulting firm.
And yet. Although the edict does not mention the Dodd-Frank act of 2010, which
redefined financial regulation after the crisis of 2008, it is chiefly aimed at
that law. (Another presidential memorandum paves the way to aborting a rule
tightening financial advisers obligations to Americans saving for retirement.)
Many banks, especially smaller ones, loathe the 848-page act and its reams of
ensuing rules. According to Davis Polk, a law firm, 111 of its 390 rule-making
requirements have not yet even been finalised. Mr Trump has called Dodd-Frank
a disaster and vowed to do a big number on it. How big a number his team
has in mind and how much it can manage is still not entirely clear.
Thanks in part to Dodd-Frank, America s banks are far safer than they were: the
ratio of the six largest banks tier-1 capital (chiefly equity) to
risk-weighted assets, the main gauge of their strength, was a threadbare 8-9%
before the crisis; since 2010 it has been 12-14%. Among much else, the act also
introduced stiff stress tests of the most important banks ability to withstand
further storms; obliged them to draw up living wills to prepare for
bankruptcy, should calamity strike; and banned them from trading in securities
for their own profit, a restriction known as the Volcker rule.
Enough, say bankers. Mr Trump, though he bashed Wall Street on the campaign
trail, now seems to agree. Gary Cohn, his chief economic adviser and president
of Goldman Sachs until December, told the Wall Street Journal that because
banks must hold more and more and more capital...that capital is never getting
out to Main Street America. Dealing with multiple regulators, he said, was
holding lending back. He also cast doubt on other bits of Dodd-Frank, notably
its procedures for liquidating big banks when the bankruptcy code cannot be
applied.
That echoes complaints voiced many miles from Wall Street. Wayne Abernathy of
the American Bankers Association, a trade body, argues that community banks are
shunning loans to new or marginal customers, rather than having to justify
themselves to several regulators. Lending is being narrowed down to mortgages,
familiar customers and agriculture, he says. This in turn exposes banks to
another complaint from supervisors: that their lending is too concentrated.
In softening Dodd-Frank s impact, administration looks easier than legislation.
Dodd-Frank gives regulators power to intervene, but it also gives them
discretion to desist, as Mr Trump may tell them to do. Rules not yet completed
may be allowed to die; others enforced less vigorously; consistency among
regulators can be encouraged. This may take time. Steven Mnuchin, Mr Trump s
choice for treasury secretary, is likely to be confirmed soon, but important
lower-ranking jobs in the department, also needing senators approval, must be
filled. Mr Trump also must find a vice-chairman of the Federal Reserve with
responsibility for financial supervision. Once he does, Daniel Tarullo, the Fed
governor who has been standing in, is expected by many to resign. Slots at
other regulators are either vacant or soon will be.
Barriers to exit
The obstacles to changing laws are higher. Although the Republicans hold both
houses of Congress, they have only a 52-48 lead in the Senate, shy of the 60
votes needed to break a filibuster. Persuading eight Democrats to support
legislation making life easier for banks is a tall order.
Still, Mr Elliott notes, some bipartisan agreement in Congress is possible
notably on raising the threshold for a bank to be a systemically important
financial institution , or SIFI, from $50bn of assets, to perhaps $250bn: the
34 SIFIs undergo annual stress tests and capital reviews conducted by the Fed.
That would suit, among others, Zions Bancorp, a Utah-based lender with assets
of $63bn an improbable systemic threat. It has taken on nearly 500 staff to
deal with compliance, internal auditing and so forth and spent many millions on
quantitative models. These now underpin its decision-making about capital and
lending, and Zions is not inclined to cut back on their use. But Harris
Simmons, its boss, would like relief from being subject to the Fed s black box
.
Proposals that may affect the spending of public money, which require only a
simple majority, could also be forced through. This could allow Republicans to
rein in the Consumer Financial Protection Bureau, a body created by Dodd-Frank
and financed by the Federal Reserve, rather than directly by Congress. It may
also allow them to gut the liquidation procedure, which envisages a temporary
fund of public cash to purists, an unacceptable taxpayer bail-out.
Jeb Hensarling, a Republican congressman from Texas, is likely to reintroduce
legislation he proposed last year, offering big banks less onerous regulation,
including relief from the Volcker rule, in exchange for higher capital: a
minimum leverage ratio of equity to unweighted assets of 10%. But this attempt
may fail in the Senate. Few big banks are eager to return to proprietary
trading in any case; and they think they have plenty of capital, thank you.
Thomas Hoenig, vice-chairman of the Federal Deposit Insurance Corporation, a
bank supervisor, disagrees. We need to have a simple way of measuring capital
the leverage ratio and that ratio needs to be around 10%, he says. In June the
average for America s eight globally significant banks was just 5.75%. With
much stronger banks, other bits of regulation could fall away. Stress tests
could be run by lenders themselves, rather than the government, and there would
be no need for Dodd-Frank s contentious liquidation procedure.
Nothing so radical looks likely. But lighter regulation makes sense, especially
for smaller banks. Less capital, especially for big ones, assuredly does not.
This article appeared in the Finance and economics section of the print edition
under the headline "Shearing and shaving"