Dodd-Frank rewrite could disappoint everyone

After signing, U.S. President Donald Trump holds up an executive order rolling back regulations from the 2010 Dodd-Frank law on Wall Street reform at the White House in Washington, U.S. February 3, 2017. REUTERS/Kevin Lamarque

WASHINGTON (Reuters Breakingviews) - U.S. bankers are suddenly full of hope. They reckon Donald Trump will roll back the 2010 Dodd-Frank reforms, enacted to avoid a repeat of the 2008 financial crisis. Yet the president’s executive order calling for a review, signed on Friday, does little that’s concrete. Meanwhile, any talk of diluting the rules has Democrats howling.

Trump complained on Friday that his friends are unable to borrow money because of excessive bank regulation. He signed an executive order that he said would slash Dodd-Frank red tape. Ex-Goldman Sachs second-in-command Gary Cohn, now a Trump adviser, added his voice. Wall Street got a boost, with Goldman shares climbing about 5 percent on Friday. Investors are salivating over the $130 billion more capital the six largest U.S. banks held in 2016 than the required minimum. The excess could, theoretically, be returned to shareholders – or used to support lending.

Yet the White House directive only really asks the Treasury secretary to work with regulatory agencies to review rules and ensure they promote certain principles, like fostering economic growth. The secretary is supposed to put together a report on the findings within 120 days – although nominee Steve Mnuchin has not yet been approved by the Senate.

And only Congress, which passed Dodd-Frank, can make major changes. Most tweaks will need the backing of 60 senators, and Republicans fall short by eight votes. Liberal lawmakers are mobilizing against them. On Monday, House Democratic leader Nancy Pelosi held a press conference decrying Trump’s efforts to “put Wall Street first.”

House Financial Services Chair Jeb Hensarling is leading a separate effort to override the 2010 law, but his bill poses problems for banks. His blueprint would spare them many Dodd-Frank rules but only if they maintain at least a 10 percent ratio of capital to assets – higher than at present, not lower. The largest firms are also constrained by the Federal Reserve’s stress tests, which limit how much banks can pay out as dividends or buybacks.

Given all the hurdles, the rewrite of Dodd-Frank will probably be less than sweeping. The Volcker Rule, limiting proprietary trading, could be softened or abandoned and regional and smaller banks might be spared some of the regulations. Banks and their critics may both end up disappointed.


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