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19 May

Regulatory Reform: Potential Changes to the Dodd-Frank Act

Regulatory Reform: Potential Changes to the Dodd-Frank Act


President Donald Trump has promised to complete a major overhaul of the Dodd Frank Act, which was signed into law on July 21, 2010. President Trump has said that “the Act has hindered banking growth by making it harder for Banks to lend to the consumer and small business population”. An executive order was signed by President Trump in early February 2017 to dramatically scale back the Act. The executive order, which was posted to the White House Website, included principles to foster economic growth, prevention of taxpayer bailouts, and public accountability within federal financial regulatory agencies. If President Trump’s executive order is successful, it could eventually lead to the replacement of the Dodd-Frank Act.

The largest area of early focus will more than likely be the Financial Stability Oversight Council. A system has not been put in place to resolve a failing bank without government aid or posing a risk to the financial system. Additionally, the President is more likely to gain support for regulatory relief on small and mid-sized banks. Dodd-Frank imposes expensive new burdens on these institutions. Senator Mark R. Warner (D-VA) believes that “targeted relief to community banks is appropriate, but the whole framework of Dodd-Frank should not be undone due to its essential safeguards”.

The plan for dismantling the Dodd-Frank Act is the Financial CHOICE Act (Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs), which was introduced by the House Financial Services Committee chairman, Jeb Hensarling. The most prominent provision to the CHOICE Act would allow a Bank to raise their leverage ratio to 10%, held in reserve to cover potential losses, in exchange for freedom from the regulatory scrutiny of Dodd-Frank. This could be done by any Bank, regardless of its size. The new regulation would be less costly for Banks to comply with, however some Dodd-Frank advocates say that the 10% reserve cushion would not be large enough to prevent another financial crisis if some of the largest Banks fail.

The CHOICE Act also aims at the Consumer Financial Protection Bureau (CFPB). The proposed changes to the CFPB are set to reduce controversial actions, as seen by Congress. A structural change would take place, replacing the single director with a five person commission. Funding would no longer come from the Federal Reserve, instead a budget would be approved by Congress. This would allow law makers more control over the agency. It would also remove the CFPB’s ability to ban products or services that it renders as abusive in nature.  Lastly, new rules issued by the CFPB would go through a cost benefit analysis to determine whether the rule makes sense financially. It would allow for easier refusal of new regulations.

Finally, the CHOICE Act would repeal the Volcker Rule, which prohibits Banks with access to the FDIF (Federal Deposit Insurance Fund) from making risky investments, as well as repeal the new “Fiduciary Rule.” The fiduciary rule repeal would no longer limit retirement advisers on the financial services that they can sell, which could possible expose the consumer to conflicts of interest.

Overall, the effects on Community Banks from the Dodd-Frank reform/dismantling cannot fully be seen until the dismantling actually occurs and is written in to law, which could be a lengthy process. However, in judging the potential changes, the regulatory reform seems to aim a making it easier for smaller and mid-sized banks to continue to grow and introduce new products, while not being as heavily burdened by expensive and time consuming regulations. All Banks, including the largest, will be held accountable for their actions and performance, but with a “scaled down” set of regulations, where appropriate. Only time will tell the true effects, as nothing is set in stone thus far.  Stay tuned for additional blogs as the changes progress.

Article prepared by Jason Kline.