Banking executives have been highly critical for years of key parts of the Dodd-Frank legislation, which was passed in 2010 and imposed a broad range of strict regulations over the industry in the wake of the 2008-2009 financial crisis.
But they now are moving to quickly head off President-Elect Donald Trump and other critics who are talking about dismantling it entirely, according to The Wall Street Journal.
“We’re not for wholesale throwing out Dodd-Frank,” said JPMorgan Chase & Co. (JPM) CEO Jamie Dimon. The Journal quoted Dimon at a conference of big bank executives. While a Republican-sponsored bill to overturn Dodd-Frank has been gaining support in the House since the election, and President-Elect Donald Trump’s transition team seems eager for repeal, bank executives have turned more cautious.
Costs of Repeal
Dodd-Frank has cost banks hundreds of millions of dollars in compliance and restructuring costs, according to the Journal, and forced them to exit businesses such as proprietary trading in response to the Volcker Rule. Bank executives fear that a new wholesale changing of the rules will be another costly, disruptive exercise.
Moreover, bank executives see some key positives in Dodd-Frank. It forced them to focus more keenly on risk management. Also, enhanced capital requirements have made U.S. banks much stronger, especially compared to their troubled European counterparts.
Bankers want three key parts of Dodd-Frank changed, the Journal says.
For starters, they say the annual stress tests conducted by the Federal Reserve are too subjective, time-consuming and costly. Bank executives want the process to be more transparent, with clearly identified testing criteria. Bill Demchak, the CEO of PNC Financial Services Group Inc. (PNC), told the Journal that the annual stress tests bring his bank “to a grinding halt” and that 40% of the effort expended brings no benefits.
Banks have been perhaps loudest in their bitter criticism of the Volcker Rule, which prohibits banks from proprietary trading in securities, an area in which they often reaped large profits. Bankers point out that regulation of the rule is spread across five different government agencies, which multiplies paperwork burdens. Meanwhile, JPMorgan Chase CEO Dimon says that banks are still allowed to make markets in various commodities, and banning banks from doing the same with financial instruments makes these markets less liquid, hurting both investors and issuers.
Hazy Capital Rules
Another target of frustration is the rules on capital and liquidity, which bankers say are overly complex, and sometimes produce perverse results. For example, to comply with both minimum capital requirements and liquid asset requirements, banks have been forced to limit lending to businesses, which has constrained the economic recovery. Also, as with stress tests, bankers complain that the capital rules are hazy, in a constant state of flux and enforced subjectively.
Bankers are betting that they can exploit the opening presented by the incoming Trump administration to fix these these specific problems in Dodd-Frank. After years of criticism of the bill, the risk is that industry CEOs might get more than they asked for: a full repeal of the landmark bill that could create as many problems as it solves.