Since its inception, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) has faced heavy criticism.1 Passed as comprehensive legislative response to the financial crisis of 2008, the Dodd-Frank Act expanded regulations on financial institutions. Its repeal would cause a dramatic change in the landscape of financial regulation in the United States. The election of Donald Trump to the presidency, combined with a republican-controlled Congress, has drastically shortened the Dodd-Frank Act’s life expectancy.
House and Senate republicans argue that Dodd-Frank imposes a burden on financial institutions that hinder their ability to provide affordable financial products. Moreover, they argue that the Act falls flat in addressing the real issues behind the crisis, noting it was not the financial institutions behind the cause of the crisis—it was government overregulation.2
Dodd-Frank’s defenders have argued that the Act is a strong step in the right direction, filling in major regulatory gaps and vastly expanding the scope of consumer protection laws. In addition, supporters of the Dodd-Frank Act argue that it is a forward looking statute that focuses mitigating systemic risk through prudential regulation and prohibiting practices that threaten financial stability. These restrictions include prohibitions on proprietary trading by banks and heighted disclosure and oversight requirements for mortgage lenders and issuers of mortgage-backed securities. The Dodd-Frank Act also established the Financial Stability and Oversight Council (FSOC) and the Office of Financial Research (OFR) to monitor systemic risk, created a new regime for the orderly liquidation of insolvent financial institutions, and gave broad enforcement and rulemaking powers to the newly created Consumer Financial Protection Bureau (CFPB).
On the campaign trail, Donald Trump promised to “dismantle” the Dodd-Frank Act, a move he believes will help reinvigorate the U.S. economy.3 Provisions that fellow republicans find ripe for the chopping block include the Volcker Rule containing the prohibitions on proprietary trading and hedge fund ownership by banks, the CFPB, and the FSOC.4
The CFPB has received great criticism from republicans due to its status as an independent agency, which they argue creates a lack of accountability.5 However, those in support of the CFPB argue that the agency’s independence has allowed it be a powerful advocate for consumers, citing to the $10.1 billion in consumer relief the CFPB collected over five years of enforcement activity.6 One area of Dodd-Frank that has received bipartisan support is the capital holding requirements imposed on banks, which were incorporated in accordance with the international Basel III accord. In particular, many republicans are in favor of preserving the capital and liquidity buffers banks are required to maintain to guard against sudden financial shocks.
While on the campaign trail Trump met with House Financial Services Committee Chairman Jeb Hensarling to discuss future steps toward deregulation. Hensarling has proposed a bank leverage ratio that exceeds the current standard, but which rewards compliant institutions by providing lighter-touch regulation on banks exceeding the ratio7
President Donald Trump’s first few weeks in office have confirmed that he intends to keep his campaign promises. On February 3, Trump met with Wall Street executives to gain insight on the regulatory impact Dodd-Frank has had on the financial sector. Later that afternoon, Trump issued an executive order aimed at restructuring the Dodd-Frank Act to promote competition and economic growth.8 In a separate action, Trump signed a memorandum directing the Department of Labor to review the Obama administration’s rule imposing a fiduciary duty on investment brokers who manage retirement accounts.
It is unclear whether the Dodd-Frank Act will be repealed as a whole, or whether certain provisions will be left intact. It is even less clear what effect this may have on the economy. Some see Trump’s public criticism of Dodd-Frank as a looming threat that another wave of deregulation—what many believe to be the source of the 2008 crisis—will cause another similar crisis to occur.9 Regardless, it appears that deregulation of financial institutions will be the new trend for at least the next four years.
Dodd-Frank Act, Pub. L. No. 111-203 (2010). ↩
Mike Konczal, Did Regulation Cause the Financial Crisis?, The Atlantic (Sep. 21, 2009), http://www.theatlantic.com/business/archive/2009/09/did-regulation-cause-the-financial-crisis/26880/. ↩
Marilyn Geewax, Trump Team Promises To ‘Dismantle’ Dodd-Frank Bank Regulations, NPR (Nov. 10, 2016, 4:48 PM), http://www.npr.org/sections/thetwo-way/2016/11/10/501610842/trump-team-promises-to-dismantle-dodd-frank-bank-regulations. ↩
Laurence Arnold and Jesse Westbrook, What Trump Might Mean for Wall Street Reform Law: QuickTake Q&A, BLOOMBERG (Nov. 11, 2016, 7:55 AM), https://www.bloomberg.com/news/articles/2016-06-07/quicktake-q-a-how-dodd-frank-could-be-on-the-ballot-this-fall. ↩
Robert Harrow, Reasons Why Donald Trump Should and Shouldn’t Dismantle Dodd-Frank, FORBES, (Nov. 17, 2016, 9:38 AM), http://www.forbes.com/sites/robertharrow/2016/11/17/reasons-why-donald-trump-should-and-shouldnt-dismantle-dodd-frank/2/#1a2db1661b66. ↩
Jesse Westbrook, Super-Capitalized Banks Free From Rules in Republican’s Plan, BLOOMBERG, (June 7, 2016, 3:24 PM), https://www.bloomberg.com/news/articles/2016-06-07/super-capitalized-banks-free-from-rules-in-top-republican-s-plan. ↩
Ben Protess & Julie Hirscfeld Davis, Trump Moves to Roll Back Obama-Era Financial Regulations, N.Y. TIMES (Feb. 3, 2017), https://www.nytimes.com/2017/02/03/business/dealbook/trump-congress-financial-regulations.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=a-lede-package-region®ion=top-news&WT.nav=top-news&_r=0. ↩
Michael S. Barr, Trump’s Dismantling of Dodd-Frank Would be 2008 All Over Again, FORTUNE (Dec. 8, 2016, 4:38 PM), http://fortune.com/2016/12/08/trump-dodd-frank-2008-financial-crisis-steve-mnuchin/. ↩