The victory of president-elect Donald Trump has connotations for all areas of US policy, domestic and foreign. For financial services, however, one question dominates: with his upcoming control of both the House and Senate, will Trump repeal Dodd-Frank?
Trump has said he will aim for a wide-ranging deregulatory spurt but his White House transition team has also indicated that any repeal of Dodd-Frank is neither a priority nor likely to be wholesale. That said, the logic of Trump’s aim of deregulation is clear - he has made huge promises on economic growth while also vowing to wind down the scale of immigration to the US and re-introduce protectionism. Both actions – if pursued – will work against growth and so only increase the attractiveness of using domestic policy levers such as deregulation. With monetary policy exhausted, and expansionary fiscal policy unlikely given Trump’s promised tax cuts, any dismantling of Dodd-Frank will likely be seen as a way to pursue faster GDP growth.
However, a wholesale repeal of Dodd-Frank is far easier said, or tweeted, than done.
“Mr. Trump says he’s going to repeal and replace Dodd-Frank, and that’s certainly possible – but it’s harder than you might expect,” said Scott Cammarn, partner at Cadwalader Wickersham & Taft in Charlotte.
Home and abroad
At least one core reason lobbies against a wholesale repeal of the 2010 bumper law that is Dodd-Frank – legislative impracticality.
“It’s not practical to speak of repealing Dodd-Frank and only thereafter making changes: you start from where you are,” said Steve Lofchie, partner at Cadwalader Wickersham & Taft in New York.
- With control of the House and Senate, will Trump move to repeal Dodd-Frank?
- Repealing the law in its entirety is very unlikely – especially given Democratic resistance;
- Dodd-Frank is also populated with G20 and Basel-derived rules, making them harder to strike;
- A lot of expense has been directed towards compliance and registration;
- However, Trump will tackle Dodd-Frank in part, with deregulation the 'new normal'.
Perhaps that’s obvious to anyone who’s worked with the federal government: Washington DC is a tough place to get things done. But there’s also the strong political opposition the president-elect will likely face. Accordingly, Cammarn said the repeal talk should be seen as perhaps an aspiration or a proposed direction, on the grounds of the obstacle presented by the Senate democrats and how long the law’s been on the books.
“Much of Dodd-Frank is already ingrained in US banking regulation,” he said.
This raises an interesting point, in that the Dodd-Frank Act is not a wholly domestic beast. While parts of the law were made in America, others were instead derived from the Basel Accords.
“The US has signed onto G20 commitments. In addition to our own domestically self-imposed rules, we also have international commitments,” said Peter Malyshev, partner at Reed Smith.
This hybrid nature creates issues that have not been fully considered. If the largest member of the Basel Accord adopts legislation that is no longer consistent with the Basel framework, regulatory competition could pick up pace, perhaps feeding into any future showdown between the UK and EU in terms of a competition to attract global business.
Certainly the US reneging on its G20-derived agreements would spell disruptions, and maybe even major problems, for US banks that wish to do business abroad. In short, Dodd-Frank is linked to the US relationship with other jurisdictions – throwing it out would damage those links.
In for a penny
Ironically, after so many years of lobbying, it might not be in the industry’s best interest to tear Dodd-Frank to shreds. One issue is cost: the industry has already spent billions of dollars on compliance, restructuring and registration. According to Malyshev, some case law has also already been established in courts under the new Dodd-Frank authority.
“If you scrap it completely, a lot of deregulation and de-compliance will have to be done and a lot more money have to be spent,” he said.
That counter-intuitive vibe extends to arguably the most derided aspect of the entire law – the Volcker Rule. Long a target of grumbling for frustrated market participants, the rule may not prove itself an obvious target under the Trump agenda.
"It's not going to be a 100% repeal - it's probably going to be 30 or 40%, even less"
“Given all the work already done by banks on compliance, it is not clear how scrapping the Volcker Rule at this stage would boost near-term jobs,” said Lewis Cohen, partner at Hogan Lovells. “Plus, there’s some risk: for the GOP to remove those regulatory guard rails and then allow a bank to bounce a bowling ball into another lane would not be a good look."
And in areas of headline interest for regulators, the clock will not be turned back. “The OTC derivatives market will not go back to being unregulated,” said Evan Koster, partner at Hogan Lovells.
That said, the regulators themselves may find they’re dealt a weaker hand. “While the major tenets of Dodd-Frank will still be in legislation in one form or another, the regulator’s interpretation of those tenets may become much more limited,” Koster added.
Thinking about the future
So where can Trump deregulate and how far can he repeal president Barack Obama’s signature Wall Street reforms?
One idea might be for his administration to raise some of the dollar thresholds in the Dodd-Frank Act, declaring that small-to-mid size banks would be free from onerous aspects of the legislation that apply to larger banks. This wouldn’t require too much in the way of changes to the law itself and is something that bank regulators in the US have pitched before.
Another would be to look around for who’s already done the work. In this case, it’s Trump's own party. The GOP has been busy, with figures such as Senator Shelby, Congressman Hensarling and Congressman Tipton tirelessly raising ideas and drafting bills. One such is Hensarling’s Financial CHOICE Act, which expires at the end of the current session and would need to be reintroduced. It offers a number of striking changes: it allows banks that are well capitalised to grow or engage in acquisitions, it removes the Fed's annual comprehensive capital analysis and review, strips the US Treasury’s ability to designate non-banks as systemically important financial institutions, cans the Volcker Rule, further limits Fed bailouts, tackles the controversial Consumer Financial Protection Bureau while also providing notable regulatory relief for small banks.
“I wouldn’t necessarily critique the CHOICE Act as a fully formed bill. I think you have to view it, in fairness, as an effort at establishing directional concepts,” said Lofchie. Concepts that are, nonetheless, compelling to Republican eyes.
During the campaign, Hillary Clinton converted to a largely anti-Wall St stance under the pressure of the Bernie Sanders insurgency. In private, she reportedly had good relationships with many senior figures in the world of finance. Nonetheless, had she won, president Obama’s regulatory framework would have largely remained intact. But if the wholesale repeal of Dodd-Frank was unimaginable under a Clinton presidency, it also seems hardly practical under a President Trump.
“It’s not going to be a 100% repeal; in practice, when the dust settles, it’s probably going to be 30-40% or even less,” said Malyshev.
Instead, counsel should expect key parts of the law to be targeted and replaced, with deregulation the overall flavour of 2017. That said, and before January, what President Trump considers the limits of domestic practicality or external diplomacy is anybody’s guess. He may once again surprise us all.
Trump’s jobs and growth dilemma
Trump victory signals uncertainty
Why Financial Choice Act won't replace Dodd-Frank