3 truths of the Dodd-Frank regulatory rollback

I’ve been asked since November how the Trump administration and Republican congressional majority will affect financial services regulation.

President Trump’s pledge to remove regulatory impediments includes a mandate that, for every new rule written, two will be abolished. Actions thus far show that convention and tradition matter little, and longstanding protocols may not be honored by the new regime.

{mosads}Speculation is perilous in an “all bets off” environment. Those trying to figure out where financial regulation is headed should remind themselves of three truths that will persist even when presidential or congressional actions are volatile and unpredictable.

Truth #1: Any Respite from Rulemaking is Welcome

The regulatory freeze memorandum issued Jan. 20 temporarily halted new rules. Common during a presidential transition, this action allows incoming leadership to curtail carry-over policies of prior administration.

The Banking Compliance Index® reveals that since January 2013, banks and credit unions alone have dealt with 1207 new rules spanning 53,486 pages in the Federal Register. No matter how temporary, any reduction in the volume or velocity of regulatory change gives bankers a needed break.

Truth #2: Dodd-Frank Won’t Go Away Quickly or Easily

Four facts support the notion that we won’t see the repeal of Dodd-Frank any time soon.

1) Legislative action is required to overturn laws. Even a Congress fully committed and unified toward eliminating the Dodd-Frank Act must carry that intent forward via a methodical process.

Unity is unlikely given the staunch consumer advocacy of lawmakers like Sen. Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Va.). In addition, consider that nearly a decade was needed to implement the rules that flowed from Dodd-Frank.

Undoing the same work would take as long, if not longer, given the newly-imposed hiring and wage freezes at Federal agencies. 

2) A presidential executive order (EO) repealing Dodd-Frank in its entirety would trigger a judicial review. Executive orders can be nullified upon judicial review if they are unconstitutional or if they are not supported by statute.

The courts may also deem that legislative action is required if a major policy initiative is the subject of the EO. A reform as sweeping as Dodd-Frank is likely to be deemed a major initiative for such purposes.

If so, then it’s back to Congress to do the legislative work. No speed in that route.

3) Legislative gumption to tackle another major rules overhaul concurrent with the Affordable Care Act (ACA) will be low. With the public spotlight on health care thanks to President Trump’s day one EO, legislators may run short on bandwidth to address a second massive statute. 

4) If financial markets continue to fly high, the appetite to press for financial services deregulation will decrease. With Wall Street outperforming even the most bullish predictions and bank stocks surging in value against higher earnings and profits, the voices that might still be singing from the deregulation hymnal may have less clout with Congress and less credibility with the common citizen. 

Truth #3: Data Outperforms Pundits

Over time, regulatory velocity is not influenced by the party in power in the executive or legislative branches.

In the period between 1995 and 2016, new regulations affecting banks and credit unions were issued at a rate of 50 to 75 per quarter, regardless of which party controlled the houses of Congress or the White House.

There were an average of 48 new rules per quarter from 1995-2005, and that average increased only slightly, to 55 per quarter between 2005 and 2015.

What changed dramatically after 2008’s financial meltdown was regulatory volume. Regulatory page counts for banking-related rules, which averaged 1,600 pages per quarter from 2003-2008, more than doubled to 3,309 pages per quarter by 2016. 

Regulations became more complex as they had to address a more complex set of conditions. The unique profile of the crisis period dismisses any correlations along party lines.

Myriad factors contributing to the crisis required a diverse response.

Rules governing securitized asset portfolios, the commingling of investment bank and commercial bank activity, addressing “too big to fail” institutions and regulatory response to failures were among the dozens of problem issues that the rulemaking had to address.

Untangling such a complex web is never straightforward nor swift.

Seasoned business professionals learn over their careers to avoid excessive joy or despair at the changing of the guard in Washington, D.C. The same cycles of regulation and deregulation repeat themselves as they ebb and flow with the economic tides.

Buoyed by hyperbole and showmanship, this cycle may provide more surprises than those of the past. But the outcomes for the financial services sector may be far less dramatic than the political climate in which they occur.

Pam Perdue is Continuity’s executive vice president and chief regulatory officer. She has more than 20 years of financial services regulatory and tech industry experience, including time spent as a federal examiner, chief compliance officer, consultant and entrepreneur in the regtech sector.

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