Dodd-Frank ripe for reform, not repeal

Donald Trump repeatedly called for repealing Dodd-Frank during his election campaign, echoing the cries of many bankers and other market participants. That message continues to resonate with Dodd-Frank opponents while strengthening the resolve of supporters to block even minor reforms to the legislation.  

Dodd-Frank is the 863-page bill Congress passed in July 2010 to rectify what many contended were the underlying causes of the 2008 financial crisis.  The bill also sought to strengthen the U.S. financial system by eliminating “too-big-to-fail” entities. It enacted major reforms in mortgage lending and created other consumer protections, including the much-reviled Consumer Protection Financial Bureau (CFPB). 

Financial institutions, along with numerous regulatory agencies, have spent hundreds of millions (if not several billions) of dollars implementing or modifying regulations mandated by Dodd-Frank. They have eliminated or downsized various lines of business, such as securities trading.

As a result, the U.S. financial landscape has changed significantly, as have many financial products offered by banks and other financial firms.  Many see these changes as harmful to the economy’s recovery from the 2008 crisis.  Hence the cry:  “Repeal Dodd-Frank!” 

A repeal of Dodd-Frank is simply not practical — too much water has flowed over the proverbial dam. Next year marks the seventh anniversary of Dodd-Frank’s enactment.  Instead of a repeal, the political battle will be over eliminating or reforming specific provisions in Dodd-Frank while adding new provisions.  

Rep. Jeb Hensarling’s (R-Texas) Financial CHOICE Act of 2016 (H.R. 5983) represents a comprehensive revision of Dodd-Frank.  That 512-page bill was reported from the Financial Services Committee in September, but was not taken up for a vote on the House floor. 

Chairman Hensarling has stated that he will reintroduce the CHOICE Act early next year.  Sen. Mike Crapo, the likely chairman of the Senate Banking Committee next year, has not indicated how he plans to approach Dodd-Frank. 

Clearly, the focus in the next Congress will be to reform Dodd-Frank.  Given a sufficiently large Republican majority in the House, passage of Mr. Hensarling’s CHOICE Act is fairly certain, although it will differ in some regards from this year’s bill. 

It is too soon to know the extent to which the Trump administration will seek to influence various provisions in next year’s CHOICE Act, or Dodd-Frank reform generally. 

While the CHOICE Act should have a relatively smooth passage through the House, that will not be the case in the Senate. Given the narrow Republican majority, and that body’s often-invoked procedural roadblocks, Dodd-Frank reform will have a much tougher passage through the Senate, with approval possibly sliding into 2018. 

Perhaps the greatest hurdle in reforming Dodd-Frank will be the CHOICE Act’s restructuring of the CFPB as an independent, five-member bipartisan regulatory commission comparable to the SEC, FDIC, FCC, and FTC.  Sen. Elizabeth Warren (D-Mass.) will likely lead the opposition to that restructuring.

A probable companion proposal will aim to subject the CFPB to the appropriations process.  Dodd-Frank stipulated the Federal Reserve would fund the CFPB, without any congressional oversight on CFPB spending. 

Reducing the regulatory burden on community banks is another potentially contentious aspect of Dodd-Frank reform. Regulatory burdens on the 5,700 community banks, aimed at preventing bank failures and protecting consumers, have grown steadily in recent decades and were exacerbated by Dodd-Frank. 

This regulatory accretion is due in part to regulations intended for the largest banks that are also being applied to smaller institutions. The challenge for Dodd-Frank reformers will be to carve out meaningful exceptions for community banks that still ensure their soundness while providing adequate consumer protections. 

Repealing the authority of the FSOC will likely be combative. Created by Dodd-Frank, FSOC designates firms as “systemically important financial institutions,” or SIFIs.  Numerous amendments to the securities laws will also be considered to enhance the ability of smaller companies to raise capital while encouraging greater accountability from Wall Street. 

The devil in Dodd-Frank reform will truly be in its details, which is why this reform will be a contentious process. Given Republican control of both chambers and the White House, Dodd-Frank reform in the next Congress is highly likely. What that sausage will taste like, though, is another matter.

Bert Ely is a professional consultant specializing in financial institution regulation and monetary policy.

The views expressed by contributors are their own and not the views of The Hill.