Regulatory change is coming with a new presidential administration, but experts say it’s too early to predict what those changes will be and what impact they will have on the financial sector.
During his election campaign, President Donald Trump promised deregulation in several areas of government, including the financial sector. On Feb. 3, Trump signed an executive order to review many of the financial regulations and legislation passed during the Obama administration, such as the Dodd-Frank Act and the Consumer Financial Protection Bureau.
While many experts predict numerous rules and regulations that were implemented during the Obama years likely will be rolled back, others believe it may be difficult to repeal regulations that have been in place for some time or have popular appeal.
Ian Katz, director at Capital Alpha Partners, LLC, in Washington, D.C., said while he expects regulatory changes in the financial services industry with the new administration, he doesn’t think Dodd-Frank will be repealed and taken off the books. “While repealing sounds good rhetorically, logistically it would be difficult,” he said.
Katz cited as an example the Office of Thrift Supervision, which was disbanded under Dodd-Frank and its responsibilities were moved to other agencies. If Dodd-Frank were repealed, then Congress would have to come up with new regulations for regulating thrifts.
Battle lines
Katz said perhaps one of the most contentious developments that came out of the Dodd-Frank Act was the creation of the Consumer Financial Protection Bureau.
“The CFPB creates a real battle line between sides when considering financial reforms,” Katz said. “I don’t think it will be eliminated because many of its responsibilities for oversight were taken from other agencies, but also due to the optics. It may not be good politics to repeal an agency that was created to protect the little guy.”
Katz believes a more likely scenario is the new administration will go after Dodd-Frank in pieces, changing specific parts of the law or individual regulations.
What Katz does see as a real possibility under the new administration is a change to the leadership structure of the CFPB.
“Right now, it’s a one-person directorship,” he said. “It’s likely this will change to a five-person bipartisan board under Trump and the Republican majority in Congress. For Democrats who are big supporters of the CFPB, if this is the worst thing that happens, it wouldn’t be too bad for them from their perspective.”
Katz also thinks the Republicans may go after the funding structure of the CFPB.
“Right now, it’s not funded by Congress,” he said, noting that the CFPB is currently funded by the Federal Reserve. “That could change with the new administration and Republican majority in Congress.”
Katz also believes the Volcker Rule, which restricts U.S. banks from making certain kinds of speculative investments, has a good chance of being scaled back, especially in the areas of compliance and documentation requirements for banks.
Mark Hamrick, Washington bureau chief and senior economic analyst at Bankate.com, believes “there’s a disconnect between candidate Trump and some of the populist themes he discussed during the campaign and who he’s surrounding himself with now since the election — some are establishment people that have their roots at Goldman Sachs. While financial knowledge and skills are certainly important, the risk for him is alienating his base who elected him – they voted against the establishment.”
Hamrick said there’s also debate among the Republican majority in Congress about what to do with the Dodd-Frank Act. “Some Republicans aren’t pushing for major changes, others think its regulations have inhibited economic growth and some want to completely gut it,” he said.
It remains to be seen what regulations will change under a Trump administration, Hamrick said, but he assumes Congress will be driving the change led by House Speaker Paul Ryan. The CFPB is at “the top of the list of areas seen at risk, especially in light of the recent court ruling saying its structure is unconstitutional and the president should have the power to fire its director at will,” Hamrick said.
Brian Gardner, director at Keefe, Bruyette & Woods, a financial services analysis firm in Washington D.C., also addressed the potential for changes in leadership at the CFPB in a report written for clients on Dec. 1. “The recent federal court ruling that the president has the discretion to remove the CFPB director at any time is a change to the original law,” he said in the report.
Even though CFPB Director Richard Cordray’s term does not expire until 2018, Gardner said Trump might fire Cordray, who would probably sue to block the firing.
“Whenever Trump gets to nominate a CFPB director, replacing Cordray could have an immediate impact on consumer finance companies since a new director would presumably be less aggressive in enforcing consumer finance laws and less likely to explore novel ways in enforcing these laws,” he said.
Industry priorities
In a letter sent to President-elect Trump on Nov. 9, the American Bankers Association listed several priorities the banking industry has to “achieve our shared goals for a vibrant and growing economy.”
The ABA asked the new administration to address ‘”existing banking regulations that are poorly suited to the nation’s smaller banks. Excessive capital requirements and increasing compliance demands have forced some community banks out of product lines and others out of business, exacerbating a disturbing trend in consolidation that must be reversed in order to ensure communities – particularly rural ones where a community bank is often the only provider – have access to vital financial services.”
James Cox, a Duke University School of Law professor and expert on securities law said, it remains to be seen what will happen with the Trump administration, but he does not foresee a wholesale repeal of Dodd-Frank.
“They’ll be looking at a lot of provisions of Dodd-Frank and the regulations affecting large financial institutions,” Cox said. “One big change you can bet on is a change in amount of capital required to be considered a SIFI (systemically important financial institution). If you’re designated as a SIFI, it requires more cost, more capital, and you face more regulation. Currently under Dodd-Frank, you’re designated as a SIFI if you have $50 billion or more in assets. Under President-elect Trump the asset amount required for this designation could increase to as much as $250 billion.”
The SIFI label, created in 2010 under Dodd-Frank is applied to firms that are considered “too big to fail” because their failure could create financial instability in the U.S. economy.
Freelance writer Carole Jakucs contributed to the writing and research of this article.
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