If the new president decides to rip out Dodd-Frank, it would take a Regulation Czar and a sweeping overhaul to accomplish it. An incremental, tactical repeal may be more likely, analysts say.
(Editor’s note: President-Elect Donald J. Trump and his new administration will be juggling many new policy issues, including changes to the financial services reform efforts that began under the Obama administration. In this first part of a two-part series, FTF News has asked industry analysts what market structure changes they think may come from the Trump administration. In part two for tomorrow, we check in with a key industry consultant on some of the nitty-gritty changes that firms may have to consider.)
Financial services reform will be entering a new phase with the election of Donald J. Trump as the next president of the United States, but a wholesale dismantling of the sweeping changes of the Dodd-Frank Act will be an uphill challenge for the new administration, according to industry analysts.
The Trump camp via its website has announced that it has set up its Financial Services Policy Implementation team, and laid out a bare-bones strategy.
Trump’s team is arguing that the economic hardships of Dodd-Frank serve as the main argument against it.
“The proponents of Dodd-Frank promised that it would lift our economy,” according to the Trump statement. “Yet now, six years later, the American people remain stuck in the slowest, weakest, most tepid recovery since the Great Depression. Paychecks have been stagnant. Savings are being depleted, millions are unemployed or underemployed, and millions more have dropped out of the workforce altogether. Economic growth remains below 2%, about half the historic average. The big banks got bigger while community financial institutions have disappeared at a rate of one per day, and taxpayers remain on the hook for bailing out financial firms deemed ‘too big to fail.’ ”
Ultimately, Trump’s team is arguing that despite its good intentions, Dodd-Frank has hurt the average citizen.
“The Dodd-Frank economy does not work for working people,” according to the Trump post. “Bureaucratic red tape and Washington mandates are not the answer. The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”
Texas Congressman Jeb Hensarling
It’s early days for the Trump team, and there are no specifics about which parts of Dodd-Frank will be dismantled first. However, months before the election, the Republican chairman of the House Financial Services Committee, Texas Congressman Jeb Hensarling, unveiled a plan to repeal Dodd-Frank and replace it with the Financial CHOICE Act.
The tenets of the Hensarling initiative may become more concrete legislative proposals that could play a part in what’s next for the reform of U.S. securities markets. However, industry observers are skeptical that a wholesale extraction of Dodd-Frank from current market structures and operations is possible.
“A Republican-led Washington is going to change the direction of bank regulation, or deregulation as the case may be,” says Kevin McPartland, head of the market structure and technology for market research consultancy Greenwich Associates. “A full-scale repeal of Dodd-Frank is unlikely, if not impossible, but we do expect less prescriptive derivatives rules from the SEC and CFTC under a Trump administration.”
Another analyst, Brad Bailey, a research director with Celent’s Securities and Investments practice, says that it will take some time before it’s clear if a Dodd-Frank repeal is a high priority for the first 100 days of the Trump administration.
“Dodd Frank is a massive piece of legislation, and I would say from its genesis in the wake of the historic 2007-2009 financial crisis, it became much more than originally intended,” Bailey says. “I would like to see a value-based, cost analysis of various parts to understand the net benefits that this regulation has brought to Americans in general.”
From the areas that Bailey focuses upon, regulation based upon the Dodd-Frank law “has had the unintended consequence of changing liquidity in the markets, remapping workflows in derivatives, and shifting and centralizing risk,” he says. “That said, the implementation and the changes in market structure in swaps are very much part of the landscape and I am not sure we will see changes in this area.”
One of the key outgrowths of Dodd-Frank that the Trump administration might attack is the Consumer Financial
Brad Bailey, analyst, Celent
Protection Bureau (CFPB), particularly its restrictions upon credit cards and consumer mortgages, Bailey says.
Overall, the regulatory complexities across the globe, products and jurisdictions may require “a Regulation Czar,” Bailey says.
Such a Regulation Czar would need “the power and the intelligence to decide which regulations are meaningless, which are redundant, and why there are so many different regulators,” Bailey says. “For instance, it seemed logical, in the wake of the last crisis, that the SEC and CFTC should be merged, yet that never happened.”
As for the prospects that Texas Congressman Hensarling’s Financial CHOICE Act could overwrite Dodd-Frank, the Republicans may find that swapping out Dodd-Frank may be easier in theory.
“The idea of a simple cancel and replace is far from a reality,” Bailey says. “I suspect that each new ecosystem that has been built around the Dodd-Frank law will be a separate battle, in an overall war. Of course, the GOP has considerable political capital, so that will make life easier in theory.”
Ultimately, given all that a Regulation Czar would be required to do may become “too expensive to consider” for Republicans also on the hook for cost cutting, Bailey says.
Another contentious market structure issue is a return to the Glass-Steagall act clearly separating Wall Street from Main Street banking, which candidate Trump supported.
Kevin McPartland, analyst, Greenwich
“Falling back to 80-year-old legislation that was repealed almost 20 years ago is unlikely, given how much the financial markets have changed since,” McPartland says. “And given how anti-competitive this would be for U.S. banks, the move doesn’t feel likely.”
For Bailey, it’s a case of wait-and-see.
“I think we have to see what of the many things Trump said in his run to the White House will be where he focuses,” Bailey says. “I think there have been many contradictory things said. For instance, the repeal of certain elements of Dodd-Frank and the reinstatement of Glass-Steagall are at odds. Will there be a regulatory rollback for relief or will a radical remapping of banking be the target? I suspect after thoughtful analysis of banks, and U.S. banks in particular and where they sit from a competitive perspective, a repeal of Glass-Stegall will not be a focus.”
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