Banks Less Keen Than GOP for Sweeping Dodd-Frank Overhaul

By Victoria Finkle

Drastic changes may be in the works for the Dodd-Frank Act, but the question for banks is whether Republicans will go too far.

President Trump has repeatedly called for overhauling the crisis-era law, most recently issuing an executive order that directs the financial agencies to consider scaling back regulations. The action follows his promise to “do a big number” on the “disaster” that is Dodd-Frank — refrains echoed by the law’s congressional critics.

Banks, meanwhile, have embraced targeted reforms rather than a wholesale rollback, which could spur tensions with elected officials as legislation is hammered out.

How far to go in neutering the Consumer Financial Protection Bureau and scaling back limits on proprietary trading are both issues where elected GOP officials and the banking industry may diverge. In addition, big banks are far from enthusiastic about a proposal to provide an “off-ramp” to institutions that maintain a leverage ratio of 10 percent.

“It’s unclear at this point if congressional Republicans and industry have found a way to meet in the middle over the legislative strategy regarding Dodd-Frank relief,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.

Current Mood

The banking industry’s approach to fixing Dodd-Frank hasn’t shifted significantly, but momentum is now on its side. That’s a stark contrast from recent years, when the Democratic White House made clear that it would not approve any significant changes to the law.

Camden Fine, president and chief executive of the Independent Community Bankers of America, described the mood among his members and his fellow trade groups as “euphoric.”

“We now have unified government and believe that many of the items that we’ve pursued for years can finally come to fruition,” he added.

The community banks may have what is likely the biggest opportunity when it comes to significant changes to Dodd-Frank. Regulatory relief for community banks is one of the few bipartisan issues within financial services, though efforts at passing consensus legislation have still fallen short in recent years. “On Capitol Hill, they’re like Mom, the flag and apple pie,” said Ian Katz, an analyst at Capital Alpha Partners, of smaller banks.

Though Fine said that his group has gotten “more aggressive” with its requests to Congress this year, he conceded that individual changes to the law remain much more likely than a full rollback.

“I don’t think Dodd-Frank will be totally repealed,” he said, while adding that “the chances for significant modifications to Dodd-Frank are very, very high.”

Other industry executives are equally optimistic about the potential for reforms, though most remain acutely aware that any legislative relief will need at least a handful of Democrats to avoid a filibuster in the Senate.

“The amount of opportunities and the possibilities for success are in a very different place,” said one senior financial services industry executive, who spoke on the condition of anonymity. “Instead of starting on our own two-yard line, we’re starting on the 50-yard line. It doesn’t necessarily mean we’re going to score, but we’re going to be playing on the offensive side of the field a lot more than we anticipated.”

A second financial services industry official underscored that, despite the shift in political conditions, “the new administration and the new Congress hasn’t changed our thinking or even our legislative strategy.”

While banking leaders are feeling hopeful, they remain largely focused on addressing a handful of top priorities, rather than pushing for overly broad changes to the law.

If the banks are able to clear up questions around existing rules and policies and get a number of targeted legislative fixes, “they’ll consider 2017 a banner year,” said Boltansky.

Overhaul Blueprint

The Republican sweep has lawmakers and industry revisiting the central vehicle for legislative change — the Financial Choice Act, introduced last summer by Rep. Jeb Hensarling (R-Texas), chairman of the Financial Services Committee.

The chairman is said to be working on a “2.0 version” of the bill to be released this month. The Trump administration is reportedly in conversation with the chairman and committee members on the legislation, as the White House is much more limited in its ability to unravel the law directly.

For banks, renewed focus on the Choice Act will provide an opportunity to engage more fully than last fall, when the legislation was considered more of a political document than a framework for reform.

“Last year, banks really just tried to keep out of the Choice Act conversation,” said Mark Calabria, director of financial regulation studies at the Cato Institute. “There is a level of sharpening the pencils and actually getting one’s hands dirty in the materials that was not the case before the election.”

But with more engagement comes the possibility of disagreement, especially if Republicans push for a broad overhaul of the law.

“My sense is there’s a lot in the bill that they like, but the industry would much rather look at it as an a la carte menu than a prix fixe menu,” said Boltansky. “Don’t let perfect be enemy of the good and the comprehensive be the enemy of the actionable.”

Still, as a long-time opponent of Dodd-Frank, Hensarling has now found a strong backer for sweeping reforms in the new president.

Hensarling said on Feb. 3 that Trump’s executive order “closely mirrors” his own efforts to roll back Dodd-Frank. He joined the president at the White House for the signing of the order.

Of course, some of the strong political rhetoric can be chalked up to signaling efforts to push for the most far-reaching version of a bill possible, particularly before negotiations get going in the Senate.

Sen. Mike Crapo (R-Idaho), chairman of the Senate Banking Committee, is said to be intent on planning his own package of changes to Dodd-Frank, one that would likely be more moderate by design, in an effort to entice panel Democrats. Republicans in the Senate would ultimately need at least a handful of Democratic votes to move a bill — though that looks to be an uphill battle given the divisive political climate.

For many banks, the prospect of another total overhaul is less than desirable, as the industry has already paid billions of dollars to comply with Dodd-Frank. The biggest banks also remain a political target, particularly in the wake of the Wells Fargo fake accounts scandal, and flying under the radar may be preferable to standing front and center in the current fight.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told Bloomberg Television last month that he doesn’t want the government to rip up Dodd-Frank.

Instead, Dimon said policy makers “should open it up, look what worked, look what didn’t, recalibrate it, modify it, change it, to accomplish what we want to do, which is what I call good regulation, not just more regulation.”

Volcker Rule

The head of Morgan Stanley, James Gorman, similarly told CNBC last month that he’s “not a fan of getting rid of Dodd Frank” but said some changes are needed. He singled out the Volcker Rule, a provision that bans proprietary trading and reiterated longstanding concerns that it is contributing to a reduction in market liquidity, citing a recent Fed staff paper that reached a similar conclusion.

Hensarling’s Choice Act aims straight for the Volcker Rule — which the chairman has called “misguided and unneeded” — and calls for an outright repeal. That position is at odds with what banks say they’re after.

“Nobody’s interested in going back to the days of proprietary trading,” said the second senior financial services industry official. Instead, the official noted that larger banks are seeking a clearer sense of when they’re following or violating rules, which are overseen by five regulatory agencies, and measures to counteract any declines in liquidity.

Steven Mnuchin, Trump’s pick for Treasury Secretary, echoed those industry sentiments in his testimony before the Senate Finance Committee last month. He said then that he supported the rule for institutions backed by deposit insurance, but raised concerns about compliance and liquidity.

Consumer Bureau

Lawmakers and industry officials are also in the midst of debating what to do about the Consumer Financial Protection Bureau, which has been in conservative crosshairs since its inception. But while many banks would like to see the single-director agency moved to a commission structure — or even put under congressional appropriations — there’s less interest in having the agency wiped out.

“All of the big banks for the most part have said that they’re not asking for the CFPB to go away,” said the Cato Institute’s Calabria. “They were all subject to fairly extensive consumer protection regulations before the crisis, whereas non-banks were not.”

But on the Hill, the future of the agency may still be up for debate.

“We’re fighting sometimes both sides — we do have some members of Congress who wish to eliminate the CFPB and some who want to keep it exactly like it is,” said Richard Hunt, president and chief executive of the Consumer Bankers Association, which has advocated for changing the agency’s structure.

He called the future of the agency “a jump ball” in the current political environment.

“The Choice Act sets the floor” for changes to the agency this term “which means either a commission or appropriations for the CFPB,” Hunt added. “The ceiling could be a single director of the CFPB chosen by Donald Trump or the elimination of the CFPB entirely.”

The House bill calls for restructuring the CFPB and putting it under the appropriations process, as opposed to killing the agency outright. It’s possible such changes could be achieved through the budget-reconciliation process, which requires just a simple majority in the Senate.


While there are many parts of the House bill that banks do support, they have frequently been less enthusiastic about its central “choice” — a regulatory “off-ramp” from many of Dodd-Frank’s prudential rules for banks that maintain a leverage ratio of 10 percent.

“Large banks are not really interested in major relief or in a 10 percent leverage ratio, because that would be very expensive,” said the second senior executive.

While some smaller banks could benefit from the off-ramp, ICBA’s Fine noted that the capital levels proposed in the first version of the draft are “stiff.”

“We estimated that about 60 percent of our banks could meet those capital levels on Day One and probably another 10 to 15 percent could meet those levels within a year, but there’s still a pretty high bar,” he added. “Although, if you met those levels, you’ve got substantial — and I mean substantial — regulatory relief.”

At the moment, there’s little indication that the chairman plans any significant changes to that portion of the bill.

“While we could have a full debate on whether Congress should be in the business of determining capital levels for banks, we know that the capital provision is a pillar of the chairman’s legislation and will likely be maintained in the bill,” James Ballentine, the top lobbyist for the American Bankers Association, told Bloomberg BNA in an interview.

The ABA, a trade group for U.S. banks, has said the 10 percent threshold is complicated to calculate and its effect on banks would be difficult to predict.

Calabria noted that the banks likely have several concerns with regards to the plan’s relief structure. “It’s this off-ramp choice today, but it might not be a choice in the future,” he said. “There’s also this sense from the banks that, well, at the end of the day we’ll get stuck with higher capital requirements and not get any regulatory relief.”

With the political landscape so radically shifted, the banking industry is back at the negotiating table.

“I’m sure there’s a lot of bank lawyers and lobbyists who did not bother to read the Choice Act until after the election — it’s 500 pages of legislation; it’s not an easy read,” Calabria added. “A lot of the details of the Choice Act were not really hammered out in terms of industry really going through it. You’re starting to see that now in a way that wasn’t.”

With assistance from Rob Tricchinelli

To contact the editor on this story: Seth Stern at

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