Bear Mountain Capital Inc.

Update: The Trump Administration Relaxes Several Dodd-Frank Provisions

| June 29, 2018

Blog | Economy

As we discussed on this blog over a year ago, repeal of the Dodd-Frank Act was a significant plank in President Trump’s election platform. Dodd-Frank was Congress’s legislative response to the 2007-2008 financial crisis; it substantially restructured federal oversight of the banking industry with the intent to reduce the chances of another liquidity and credit crisis.

While a complete repeal of Dodd Frank was never really in the cards (some aspects of the complex law were non-controversial) the Trump administration and Congress are moving forward with scaling back or revising some of its most important provisions.

In late May of this year, the Federal Reserve proposed a change to the so-called “Volcker Rule,” which was imposed by Dodd-Frank. The Volcker Rule prohibits banks from using deposit funds as capital for speculative investments—the idea being that even if banks lost money in their riskier operations, they would not be able to put their customer’s deposits at risk. Defining just what transactions were and were not permitted under this rule has proven difficult, however, and the Fed has acknowledged that its original approach—requiring banks to make detailed reports about every short-term position—was “needlessly cumbersome.” Instead, the Fed wants banks to establish risk limits for their overall portfolio, which the Fed would monitor on a macro basis, rather than scrutinizing individual transactions. Critics have suggested that this would substantially weaken the rule, but the Fed insists that it continues to support the principle of the rule. And Paul Volcker himself, the former Fed Chairman for whom the rule is named, recently commented, “If they can do it in a more efficient way, God bless them.”

Taking aim at another aspect of Dodd-Frank, Congress recently weakened the law’s “too big to fail” provisions, which imposed substantially greater oversight and capital requirements on larger financial institutions. The Economic Growth, Regulatory Relief and Consumer Protection Act, signed by President Trump on May 24, raised the threshold for the enhanced oversight from $50 billion in U.S. assets to $250 billion in U.S. assets. Supporters of the bill (which passed with several dozen Democratic votes) claimed that banks with less than $250 billion in U.S. assets were “suffering” from the requirements of Dodd-Frank. But while it is true that enhanced oversight does come with increased compliance costs, which can fall more heavily on smaller organizations, concerns about Dodd-Frank’s impact are undermined by the record profits and record lending volumes that the financial sector has seen across the board in recent years. And while Dodd-Frank’s critics have routinely referred to “Main Street banks” as the intended beneficiaries of this legislative change, that is, at best, incomplete. Institutions relieved of the “too big to fail” oversight provisions include American Express, SunTrust, Deutsche Bank, and Credit Suisse.

Finally, President Trump has pursued a bureaucratic guerrilla campaign against the Consumer Financial Protection Bureau. Dodd-Frank established the CFPB as an independent agency charged with protecting consumer interests in the financial marketplace. The bureau issues regulations in the area, and enforces federal law, often on behalf of individual consumers, by taking legal action against banks, debt collectors, financial planners, and others who violate federal law.

Not surprisingly, the CFPB is popular with voters, and Congressional Republications have not been able to muster the votes to eliminate it. So in November of 2017, President Trump took a different approach, essentially decapitating the organization by appointing one its fiercest critics to run it, Mick Mulvaney. Mulvany, who continues to serve in his full-time role as Director of the Office of Management and Budget, has described the CFPB as a “joke” and sponsored legislation intended to eliminate it. Since his appointment, Mulvaney has shut down or limited CFPB programs and ongoing investigations, dissolved its advisory board, and sought to eliminate its funding.

At Bear Mountain Capital, we are concerned about these changes and the risks they introduce into our financial system. The financial crisis of 2007-2008 was extraordinarily costly, and indeed could have been far worse. Cities like Seattle, and the surrounding areas in Western Washington were significantly affected, as was the rest of the country. There is no serious dispute that the crisis was caused by overly speculative, risky conduct by large financial institutions, often at the expense of unsophisticated consumers. While Dodd-Frank was not a perfect piece of legislation, it put up substantial bulwarks against a repeat of the recent crisis. Revising its provisions for the purposes of clarity and efficiency is a legitimate legislative and regulatory goal, and some of that is accomplished by these recent and proposed changes. But lowering the guardrails that have kept the financial industry from taking us off another cliff is not something to be done lightly. And considering the exceptional growth in lending and financial industry profits we have seen under Dodd-Frank, the argument that its limitations are unduly burdening the industry is hardly compelling.