Much ado has been made about the executive order the president signed on Feb. 3 outlining core principles for regulating the U.S. financial system, but the actual effect of the order will be minimal.
While not unimportant, the order is largely aspirational as it sets out a broad outline for the reforms the Trump administration will seek in financial regulation. However, the order, in and of itself, does not affect any regulatory changes.
{mosads}The order does, however, include a directive to the secretary of the Treasury, but that directive — produce a report — will not produce any meaningful changes either.
The heart of the order is the statement of seven principles of regulation, the “Core Principles.” They are as follows —
(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
(b) prevent taxpayer-funded bailouts;
(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;
(e) advance American interests in international financial regulatory negotiations and meetings;
(f) make regulation efficient, effective, and appropriately tailored; and
(g) restore public accountability within federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
I suspect even Sen. Bernie Sanders (I-Vt.) and Sen. Elizabeth Warren (D-Mass.) would not sharply disagree with these principles, although they might like to add a few others.
The Financial CHOICE Act, which Rep. Jeb Hensarling (R-Texas) will soon introduce, almost certainly will be viewed as complying with these principles.
As is always the case, the devil will be in the details of that legislation. The legislative battle will be over those details, such as how to reform the Consumer Financial Protection Bureau.
In the heat of that battle, the principles articulated above will soon be forgotten as the legislative sausage grinder grinds away.
The only substantive element of the order is the directive to the secretary of the Treasury to submit to the president a report by June 3 that identifies “any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.”
Interestingly, no reference was made to identifying court decisions that violate the Core Principles.
This could be a lengthy report, but its essence will be a listing of the laws that are inconsistent with the Core Principles.
Everything else in financial regulation flows from the statutory foundation on which regulations and other requirements are based.
It will be a long list, but just that — a list. It will be a wish list of what the administration would like repealed or substantially amended. Presumably, the CHOICE Act will reflect many elements of that list.
That the order will not trigger any sudden, or even eventual, regulatory rollback, is evident in its final section, which provides that, “Nothing in this order shall be construed to impair or otherwise affect the authority granted by law to an executive department or agency, or the head thereof.”
Translation — It will be business as usual for the financial regulatory agencies in implementing and enforcing regulations as authorized by existing law.
Some of the regulators will possibly be inclined to reflect the Core Principles in new and revised regulations, but they will be constrained by existing law in what they can do.
Finally, the order states that it “is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, it officers, employees, or agents, or any other person.”
Translation — No one should even think of trying to use this order to block the enforcement of any existing law or regulation.
The world certainly is not worse off for the issuance of this executive order, but its importance has been vastly overhyped.
The tough battle lies ahead as a Republican Congress and the administration struggle to reform the statutory framework, and not just Dodd-Frank, underpinning all financial regulation. It will not be quick, easy or flawless.
Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking and thrift industries, monetary policy, the payments system, and the growing federalization of credit risk.
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