With financial regulations in the political crosshairs, there is much discussion about the possibility of a repeal or overhaul of the Dodd-Frank Act. The reality is Congress and the Trump administration are likely to focus on a tailored approach providing targeted relief versus a wholesale repeal of the Act.
In reviewing the Presidential Executive Order on Core Principles for Regulating the United States Financial System, signed on Feb. 3, it is clear that we need to take a step back and examine the seven principles identified in the executive order. By doing so, it becomes evident that the Trump Administration is taking a balanced approach to any potential changes to rules issued under the Dodd-Frank Act.
The executive order gives the U.S. Treasury secretary 120 days to work through the Financial Stability Oversight Council (FSOC) to identify laws, treaties, regulations, guidance, and other government policies that are inconsistent and undermine the seven core principles in the order. This approach is similar to the U.K.’s principles-based regulatory structure where the government uses a set of principles to guide regulation rather than detailed requirements stated in rules.
The FSOC will now determine what level of relief the Trump administration will provide to the banks given the principals outlined without sacrificing important consumer protections put in place to prevent another financial crisis.
The FSOC was put in place to identify risk, promote market discipline, and respond to emerging threats to the U.S. financial system. Under these objectives, the Treasury secretary can work with the heads of the independent agencies, including the Federal Reserve, Consumer Financial Protection Bureau (CFPB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), and other council members to review rules issued under the Dodd-Frank Act that could lead to financial distress or market failure.
These authorities give the Treasury secretary and FSOC the ability to identify emerging market threats formed by rules issued under Dodd-Frank, authorities to address those threats, and a roadmap for Congress to rationalize any changes to the Act.
The FSOC has broad authority to monitor the financial services marketplace and emerging threats, including responding to illiquidity in the bond market caused by the Volcker Rule. This threat was identified in a recent Federal Reserve report, “The Volcker Rule and Market-Making in Times of Stress,” which highlighted the challenges in the underlying assumption that non-Volcker-affected dealers would be able to fill the liquidity gaps left by limitations on Volcker-affected dealers.
Closely linked to that debate is the competitiveness of financial markets under the U.S. Department of Labor’s final rule defining who is a ‘‘fiduciary’’ of an employee benefit plan and whether the long-term impact to investors through limitations to financial products and services outweigh the estimated costs to provide that financial advice.
While the Obama administration estimated $17 billion was lost to investors receiving investment advice where certain incentives may be misaligned, the report failed to recognize whether the overall value of that advice improved decision-making by that investor leading to a net benefit.
It is reasonable to question whether regulations and costs associated with complying with the Dodd-Frank Act has hindered economic growth and restricted consumers’ access to credit or caused market liquidity risk.
The American Action Forum (AAF) estimates that under President Trump’s memo to all executive agencies, imposing a regulatory moratorium puts a hold on “$181 billion in total regulatory costs, including $17 billion in annual costs, and 5.5 million hours of paperwork. This moratorium freezes 22 rulemakings with annual costs above $100 million and 16 measures with more than $1 billion in long-term costs.”
This is a considerable relief given that banks are a business and don’t have to just comply with financial services laws and regulations but also must be concerned with other rules related to tax, healthcare, and labor just as any other business.
Alternatively, financial institutions benefited from some aspects of the Dodd-Frank Act including resolution planning where banks were able to simplify their operating structure, streamlined legal entities, and reduce the overall complexity around managing risk. Our financial markets are clearly stronger since the financial crisis, especially when you look to the challenges that remain for banks in Europe.
Given some of the evident benefits of the law, a robust cost-benefit analysis by independent agencies could have provided increased transparency for the economic benefits and given regulators an ability to argue that the overall benefits to society outweigh the costs during the upcoming review by the FSOC.
The 120 days gives the Financial Stability Oversight Council time to reflect and determine whether there has been an appropriate tradeoff between the benefits and costs of regulation under the Dodd-Frank Act, or whether a simpler regulatory regime could achieve the same goals sought by the Dodd-Frank Act.
Peter Dugas is managing director of government affairs at the Center of Regulatory Intelligence for FIS, a global financial technology solutions firm. He served as a deputy assistant secretary at the U.S. Department of Treasury under President George W. Bush.