GOP leaves questions on financial reform

If drafts of the Republican Party platform are any indication, banking — specifically, reshaping financial regulation — would be a big priority under a Trump administration.

The GOP will vote on and ratify the platform at the party’s 4-day convention in Cleveland. The plank on financial reform comes early in the document, on page 3, and it gets more space than international trade or the tax code.

It starts with a blistering critique of the regulatory structure put in place by the Obama administration after the passage of the landmark Dodd-Frank Act. The Republican platform drafters say the administration has exerted “unprecedented control over the nation’s financial markets” and limited economic growth.

Especially hard-hit, according to the platform, are small banks, which have reported struggling with a higher regulatory burden as Dodd-Frank has been implemented.

The party fears a future where America has “a few enormous institutions, as in many European countries.”

The GOP alternative

The party platform lays out a vision for financial regulation that’s more restrained than the current implementation of Dodd-Frank. It calls for:

  • Making the Consumer Financial Protection Bureau — singled out for “regulatory harassment of local and regional banks” — into a bipartisan voting committee more akin to the Federal Communications Commission.
  • “Prudent regulation” of banks to make sure they have enough capital to cushion them against economic downturns.
  • Directing that settlement money received from law-breaking banks go to victims, with the remainder going into the Treasury.
  • Shutting down insolvent banks through the Bankruptcy Code, rather than the FDIC as set forth under Dodd-Frank.

The proposals seem to align with the financial regulation overhaul put forward by Rep. Jeb Hensarling, R-Texas, which would replace the current regimen of close scrutiny of banks’ lending and investing with a more hands-off approach.

Hal Scott, professor of law at Harvard Law School and director of the Committee on Capital Markets Regulation, sees the platform as a positive step toward paring back regulation he says is stifling the economy.

“Some people have had their heads in the sand in thinking that overregulation doesn’t have any negative impact on growth,” Scott says.

But Michael S. Barr, professor of law at the University of Michigan Law School, fears that a Trump administration would set America up for a repeat of the financial crisis.

“Donald Trump has threatened to ‘dismantle’ financial reform,” Barr says. “That means rolling back consumer protection and making the financial system riskier. It would be a huge mistake.”

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Differences even within the party

But even as the platform echoes the Hensarling bill in several respects, there are differences that would seem to suggest divisions even within the GOP on how to reform financial regulation.

Conspicuously absent from the platform draft is any reference to the idea of allowing big banks to keep large capital cushions and avoid the kind of close scrutiny that major financial institutions are subject to under Dodd-Frank, says Mehrsa Baradan, a professor of law at the University of Georgia. That approach, Baradan says, does have some support among scholars.

“There’s nothing in (the platform) that talks about capital or stress testing,” Baradan says. “All this wants to do is repeal, repeal, repeal.”

Baradan sees a troubling lack of specificity on what a Trump administration would actually replace Dodd-Frank with.

“It’s a bunch of platitudes against the CFPB and Dodd-Frank, and very little in the way of forward-thinking guidance,” Baradan says.

There are also some parts of the platform that seem at odds with reality, she says, including statements that the CFPB, which doesn’t have jurisdiction over banks with less than $10 billion in assets, is negatively impacting small banks, and that the housing crisis was caused by regulation.

One bright spot, Baradan says, is the call to put banks under the Bankruptcy Code, which could help ensure banks can be shut down in an orderly fashion.

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