The Treasury Department has produced the proposal for financial regulatory reform that President Donald Trump ordered up four months ago, pursuant to his claim that “we’re going to be doing a big number on Dodd-Frank.” Because “Dodd-Frank” is the shorthand title of an overhaul of Wall Street regulation adopted by a Democratic Congress and signed by President Barack Obama in response to the panic of 2008, advocates of a more stable and resilient financial sector had been dreading Trump’s attempts to roll it back.
Were their worries justified? Certainly the most concerning aspect of the Trump Treasury document is its disparagement of the various mechanisms Dodd-Frank created to ensure that financial institutions are adequately capitalized. Perhaps more than any other measure a government might take, none is more effective, in terms of reducing systemic risk, than requiring systemically important banks to hold a balance-sheet buffer large enough to withstand even a catastrophic recession. Yet the Treasury plan calls on the Federal Reserve to soften the terms of its annual “stress tests” of bank capital, or even make them biennial, ostensibly to liberate lending. No doubt tighter capital requirements may have tamped down lending, but swapping growth for stability is an acceptable trade-off in view of the disastrous buildup of risk that pre-crisis regulations permitted.
Somewhat more plausible is the document’s endorsement of a regulatory “off-ramp” for well-capitalized banks – that is, large institutions could qualify for relief from much of Dodd-Frank if they were to hold at least a 10 percent capital buffer. A similar idea is at the heart of the Dodd-Frank repeal that passed the House on June 8. While that bill, known as the Financial Choice Act, is otherwise studded with unwise giveaways to the financial industry, the basic idea of trading regulatory relief for solid capital has promise, provided that the capital buffer is, indeed, high-quality and subject to rigorous and regular review. Also reasonable was Treasury’s call for a somewhat looser regime for credit unions and community banks; these institutions were not significant sources of systemic risk before the crisis and still aren’t today.
What’s most striking about the Treasury plan, and the Choice Act, is how little chance they actually have of resulting in a “big number” on Dodd-Frank. True, much regulatory loosening can be accomplished through executive-branch action, as Treasury noted in its report. In particular, big banks are likely to profit from proposed technical changes to how regulators calculate their leverage ratios. Yet nothing more fundamental – such as weakening the Consumer Financial Protection Bureau, a long-standing demand of both the GOP and Wall Street – can be changed without 60 votes in the Senate. Republicans don’t have them. Also notable was the Treasury plan’s silence on reforming the housing-finance system, which has been in institutional limbo since the de facto nationalization of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation nearly a decade ago. Treasury’s report repeatedly declares its intention to revitalize the mortgage market, but without reform of Fannie Mae and Freddie Mac, any such efforts will remain insufficient.