Trump and Dodd-Frank - No Surprise Here

by James Staudt, PhD, CFA

copyright 2017, all rights reserved

President Trump may be changing aspects of the regulations issued in response to the Dodd-Frank law.  How is that even possible?  As described in more detail in Grand Collusion, despite the 2000+ pages of Dodd-Frank, the law did not set any statutory requirements on the banks.  Much was to be determined in future executive branch rulemakings.  Therefore, it is pretty easy for President Trump, or any other president for that matter, to dismantle much of what few actual requirements were imposed on the banks.  This is not to say that there are no procedures that must be followed and that litigation might slow things down; however, because Dodd-Frank set very few statutory requirements and left so much to future executive branch rulemakings, Democrats cannot even filibuster to prevent fairly substantial changes.

This exposes what, in my view, was the fatal flaw of Dodd-Frank - it did not establish much in terms of statutory requirements.  By contrast, the Banking Act of 1933 that was under 60 pages long and gave us over 50 years of banking stability, had very clear statutory requirements - separating investment banking from commercial banking along with other requirements.  The argument that is always made is that there are too many details to be included in the 2000+ page law.  The reality is that today the laws that congress passes are mostly written by lobbyists because lawmakers and their staffs are far too busy raising money to devote much time to writing laws.  So, it was no surprise that Dodd-Frank - despite its length - set very few real requirements on the banks.  Agencies therefore set rules intended to achieve the goals set forth in the law, rules that must go through a proposal and public hearing process, rules that later get litigated, and therefore take a long time to enact and can get further watered down.

So, there is no surprise here.  The only surprise might be that candidate Trump, who railed against Wall Street, now perhaps wants to relax the rules.  However, if you've read Grand Collusion, this should be no surprise.  Wall Street owns both major political parties.  In fact, there is no reason to believe that Hillary Clinton wouldn't have taken steps to change the rules issued in response to Dodd-Frank.

This is not to say that the rules put in place after Dodd-Frank was passed cannot be improved upon in some ways.  They probably can.  However, with Goldman-Sachs executives advising President Trump, it seems likely that changes will be made that favor the banks even if they raise the risk to the taxpayer.

A complaint of the banks is that some institutions find the requirements costly and burdensome. If the current requirements are replaced with simpler capital buffer requirements that are more straightforward to follow but establish a solid bulwark against future failures, that could be an improvement.  Prior to banking deregulation, capital buffer requirements were very straightforward, making "stress testing" unnecessary.  On the other hand, if rules to prevent excessive risk taking through proprietary trading by depository institutions are relaxed (the so-called "Volker Rule"), that could pose a problem regardless of whether or not capital buffers are improved.

The truth is that right now we don't know for sure what President Trump has in mind.  So, we can only speculate at this point.  But, given the influence of Wall Street on every President for the past few decades, we should not be surprised if the already weak requirements of the rules established in response to Dodd-Frank get even weaker.