A first step toward neutralizing the Dodd-Frank Act in the United States (Policy Brief)

DISCLAIMER: The opinions expressed by the author are personal and do not reflect those of the institution that employs him.

On May 22, 2018, the U.S. House of Representatives passed the bipartisan bill entitled  » Economic Growth, Regulatory Relief, and Consumer Protection Act, »[1] which was approved by the Senate on March 14, 2018, and revises certain provisions of the Dodd-Frank Act. President Trump signed the bill into law on May 24, 2018, stating:  » The legislation I’m signing today rolls back the crippling Dodd-Frank regulations that are crushing community banks and credit unions nationwide. They were in such trouble. One-size-fits-all — those rules just don’t work . »

Some background information

This law is the first step in the reform of the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter  » Dodd-Frank Act « ), which symbolizes the United States’ implementation of the financial regulatory commitments made at the G20 level following the 2007-2008 crisis.

Undoing the Dodd-Frank Act is indeed the spearhead of the Trump administration. D. Trump explicitly referred to the Dodd-Frank Act, which he called a « disaster, » when signing the presidential executive order of January 30, 2017, aimed at reducing federal regulation ( » Reducing Regulation and Controlling Regulatory Costs « ). On February 3, 2017, he signed an executive order stipulating that the regulation of the financial system should be guided by seven founding principles, including the development of U.S. economic growth, the competitiveness of U.S. businesses, and the defense of U.S. interests in international financial negotiations. The February 3, 2017 executive order also directed Treasury Secretary Mnuchin to submit a series of reports analyzing the need to reform existing financial regulations in light of the guiding principles set forth in various sectors (banking, capital markets, asset management, financial innovation). Subsequently, other executive orders along the same lines directed the U.S. Treasury Department to submit additional reports. One of these, for example, concerns the missions of the Financial Stability Oversight Council (an institution emblematic of the Dodd-Frank Act, whose missions are similar to those of the High Council for Financial Stability in France and whose effectiveness has been criticized on several occasions). Almost all of these reports were submitted to President Trump between June and November 2017, proposing reforms to several sections of the Dodd-Frank Act, including the Volcker Rule[4] (inserted in section 619 of the Dodd-Frank Act and effective^{April 1} , 2014, one of its main provisions is to prohibit U.S. banks or banks operating in the United States from engaging in proprietary trading of financial instruments for speculative purposes).

Main provisions

The Economic Growth, Regulatory Relief, and Consumer Protection Act is a bill designed to promote economic growth, provide financial institutions with appropriate regulatory relief, and strengthen consumer protection. The bill has six sections aimed at improving consumer access to mortgage credit; easing regulations applicable to community banks; provide protection for loans taken out by war veterans, certain classes of consumers, and homeowners; adapt banking regulations to bank holding companies; and support market financing (in particular through exemptions from regulations applicable to investment funds in order to promote venture capital funds[5]).

Several provisions of the law are based on the Financial Choice Act 2.0, a bill passed by Republican members of the House of Representatives in June 2017 and since blocked in the Senate, as well as recommendations issued by the U.S. Treasury in its report on banking regulations published in June 2017.

Among these provisions, the following reform elements are noteworthy:

• The law eases regulations applicable to small and medium-sized financial institutions. It exemptsany banking institution with less than $10 billion in consolidated assets or whose trading assets and liabilities are below the 5% threshold from compliance with the Volcker Rule . It also requires US agencies to consult with state banking supervisors on the implementation of a separate leverage ratio ( » Community Bank Leverage Ratio « ) of between 8% and 10% for community banks, i.e. , banking institutions with less than $10 billion in consolidated assets.
• The law raises the consolidated asset threshold above which a bank holding company is considered systemically important and subject to enhanced prudential standards from $50 billion to $250 billion. These include requirements relating to regulatory capital, contingent capital , leverage, liquidity, transparency, and annual and semi-annual supervisory stress tests. It should be noted that the law also provides for the possibility for the Federal Reserve (Fed) to maintain enhanced prudential standards (including stress tests) for bank holding companies with total consolidated assets between $100 billion and $250 billion. The law specifies that this option is available to the Fed depending on the risks posed to financial stability, as well as for global system ically important banks (G-SIBs). These are considered as such by the Fed based on its systemicity indicator (in line with the Basel recommendations).
• Finally, the law also provides forthe relaxation of the additional leverage ratio ( by requiring the exclusion from the denominator of the ratio of funds deposited with central banks by bank holding companies and their subsidiaries that are primarily engaged in custody, protection, and custody of assets) and the one-month liquidity coverage ratio by allowing more favorable treatment of municipal bonds, which are used to finance the needs of U.S. states, counties, cities, and local public agencies, as long as they have a liquid and easily tradable profile and a high rating ( » investment grade rating).

Conclusion

Trump has appointed to head the Fed andthe Office of the Comptroller of the Currency ( OCC), the agencies that will be responsible for implementing several provisions of this law, individuals whose regulatory orientations are similar to those instilled by the executive branch in recent months: Jerome Powell as head of the Federal Reserve Board and Joseph Otting as head of the OCC. Nevertheless, these agencies remain independent of the executive branch, as Jerome Powell pointed out in a speech on May 25, 2018:  » While the focus is often on monetary policy independence, research suggests that a degree of independence in regulatory and financial stability matters improves the stability of the banking system and leads to better outcomes. For this reason, governments in many countries, including the United States, have granted some institutional and budgetary independence to their financial regulators. « 

Furthermore, it should be noted that the scope of the Dodd-Frank Act extends far beyond banking institutions alone. It also covers derivatives[7], market infrastructures (including clearing houses), pension fund advisors, insurance companies, and institutions such as the FSOC and the Consumer Financial Protection Bureau.

Finally, the complete overhaul of the Dodd-Frank Act, announced several times by Donald Trump, is not currently being considered by either the US Treasury Department in its reports published in 2017 or by federal regulators.

Nevertheless,the Economic Growth, Regulatory Relief and Consumer Protection Act is the first notable reform of the Dodd-Frank Act, the landmark post-crisis legislation. It substantially eases the regulatory and supervisory requirements applicable to US banking institutions, in line with the founding principles set out by Donald Trump in his February 2017 executive order.