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Trump to sign partial Dodd-Frank repeal: A financial win or the start of a new crisis?

In this Feb. 2, 2017, photo, President Donald Trump speaks in the Roosevelt Room of the White House in Washington. Trump is taking his first steps aimed at scaling back financial services regulations. (AP Photo/Pablo Martinez Monsivais)

President Donald Trump will soon sign into law a bill partially repealing the 2010 Dodd-Frank Act, the financial regulatory framework put in place after the financial crash of 2008.

Trump tweeted his eagerness to sign the Economic Growth, Regulatory Relief and Consumer Protection Act (S. 2155) which cleared the House on Tuesday. "Big legislation will be signed by me shortly," he wrote, saying the regulatory rollback means "big changes to DODD FRANK."

According to reports, the president will likely sign the changes into law before Memorial Day.

The bill is only the beginning of a more vigorous effort to loosen some of the post-crisis restraints on the financial services sector. Since taking office, President Trump has promised to "dismantle" the 2010 banking regulations. Lawmakers and banking interests have been working for years to roll back the costly, complex web of financial rules.

Yet, while advocates of the partial repeal say it will drive economic growth by cutting regulatory costs for small banks, critics warn the renewed push for deregulation could make a future financial crisis more likely.

This week, the opponents of Dodd-Frank won a partial victory. In a rare bipartisan vote, the House approved the legislation 258-159 with 33 Democrats joining most Republicans.

The Senate passed the bill in March, 67-31, with even broader bipartisan support, when 17 Democrats voted with the Republicans to ease the regulations.

Somewhat ironically, the Senate vote was held on the ten year anniversary of the collapse of Bear Stearns, the investment bank whose failure triggered the start of the U.S. taxpayers multi-trillion dollar rescue of the financial system.

In a report released while lawmakers were considering the bill, the Congressional Budget Office warned the risk of a financial crisis or potential failure of a major financial institution "would be slightly greater" if the regulatory changes became law.

In 2010, the Dodd-Frank Act passed to become the single largest Wall Street reform since the Great Depression. It was intended to end "too big to fail," ensure financial stability and curb the reckless practices that caused the 2008 financial meltdown. It passed without a single Republican vote in the House and only three Republican "ayes" in the Senate.

Dodd-Frank was also among the largest pieces of legislation ever passed in the United States. The 2,300 pages of text in the original bill produced hundreds of additional rules and a maze of different compliance measures for the largest and smallest financial institutions.

Under the banner of providing relief to small banks, the new bill exempts certain institutions from having to comply with "stress tests," audits to prove they have the capital and resilience to withstand a financial downturn without putting the financial system at risk.

Small banks with under $100 million in assets will no longer have to comply with federal stress tests. The Independent Community Bankers Association celebrated the lifting of "suffocating regulatory burdens," saying high compliance costs hurt their ability to lend to homeowners and small businesses.

An advocate of "prudential regulation," Dr. Lawrence White of the New York University's Stern School of Business, said easing the burdens on small banks as a net positive.

"The fact is, small banks were too heavily burdened by Dodd-Frank. They were not responsible for the crisis," he insisted. "When we can ease up on regulatory requirements that add to the cost and do not add to the benefits, that's all to the good."

In recent years, some have also blamed the Dodd-Frank regulations for putting community banks out of business. According to an industry expert, the number of small banks with less than $200 million in assets shrunk by nearly 50 percent over the past 11 years. Others note the trend away from small banks has been ongoing for decades.

For medium-sized institutions and regional banks with between $100 billion and $250 billion in assets, S. 2155 will have "tailored" stress tests based on their involvement in risky activities.

According to Carter Dougherty, a spokesman for Americans for Financial Reform, this class of financial institutions was the real target of the new bill and the banking industry's record-breaking lobbying effort on Capitol Hill.

The new legislation lowers the threshold at which a financial institution is deemed "systemically important" to $250 billion, meaning those banks with $100 and $250 billion institutions are no longer considered too big to fail.

Under the original Dodd-Frank, any financial institution larger than $50 billion in assets was deemed systemically important and subject to strict oversight, multiple layers of stress tests, and other rules to limit risky behavior. By raising that threshold five times, the number of "systemically important financial institutions" goes from 30 down to only 13.

Dougherty argued it is "irresponsible" to roll back the oversight of banks between $50 and $250 billion, particularly because of their role in the 2008 crisis.

"The banks in that bracket really matter," he said, noting Countrywide Financial, the now-defunct lender at the epicenter of the subprime mortgage crisis, would be exempt from the rigorous stress tests under the new law.

During the bailout, this bracket received nearly $50 billion, he added, "So there's a certain justice in keeping them under careful federal supervision."

J.W. Verret, a senior scholar at George Mason University's Mercatus Center emphasized that the partial repeal leaves the bulk of the Wall Street regulatory framework in place and unchanged.

"This touches less than one percent of the Dodd-Frank Act; 99 percent of it is still in place," he said, noting there is no shortage of regulations still on the books for the bracket of medium-sized regional banks.

The bipartisan support for the bill was earned precisely because the bill was so circumspect, Verret said. "The most fundamental change is releasing a couple dozen banks from enhanced regulation by the Federal Reserve, but it still leaves in place a very strong regulatory framework," he added.

Much to the dismay of America's largest banks, Congress did not touch the regulations affected the biggest of the too big to fails, like J.P. Morgan, Bank of America, Wells Fargo and others. Those banks are still required to undergo multiple stress tests, comply with capital requirements and have a "living will," a plan for orderly liquidation in the event of a collapse.

However, the Dodd-Frank rollback did include at least one sweetheart provision advocated by Citigroup and other big banks which allows institutions to own more municipal debt. As the Detroit bankruptcy and rash of city defaults during the Great Recession proved, municipal debt has its risks.

The Regulatory Relief and Consumer Protection Act is not the end of deregulation under the Trump administration.

In the near future, U.S. financial regulators are planning at least two additional changes to Dodd-Frank rules. One proposal affects how leveraged a company can be based on its risky activities. Another proposal will loosen the so-called Volcker Rule, allowing more government-insured banks to make speculative investments.

White supports a full repeal of the Volcker Rule, which he called "costly" and "a waste of effort," but said he is concerned about the overall trend toward deregulation.

"It's clear that the breezes are blowing towards less regulation. That's the sense of the Congress, the Trump administration and that's the sense of the regulatory agencies," he said. "I worry this is the first step that is going to encourage them to go even further."

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