Trump Seeks Review of Dodd-Frank Provisions on Systemic Risk

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By Jeff Bater

President Donald Trump pushed forward with his vow to deregulate Wall Street by ordering a review of two key Dodd-Frank provisions that are meant to resolve failing big banks and designate systemically important financial institutions (SIFIs).

Trump, at an April 21 Treasury Department event, signed memoranda calling for separate reviews of Dodd-Frank’s Orderly Liquidation Authority (OLA) and the SIFI designation process wielded by the Financial Stability Oversight Council (FSOC).

While the reviews are underway, the Treasury secretary will be directed not to use OLA, and no new company will be designated under FSOC.

Trump criticized Dodd-Frank during his campaign for the White House and has pledged to take apart the law passed in 2010 with hardly any Republican support. Trump issued an executive order on Feb. 3 for Treasury Secretary Steven Mnuchin to review the law.

Trump Push to Continue

The new memoranda serve as a signal that the administration “will continue a push to remove key regulations that were implemented as part of the Dodd-Frank Act,” FBR & Co. analyst Edward Mills wrote in a note issued before the formal signing by Trump.

Orderly liquidation authorizes the Federal Deposit Insurance Corporation to borrow from the Treasury to lend to a failing firm, buy its assets, guarantee its obligations, and pay creditors before winding down the firm. The post-crisis provision is meant to protect other parts of financial system from the collapse of a systemically important bank.

Mnuchin, in a briefing April 21 for reporters, said an analysis of the authority will be done “to make sure that this doesn’t encourage excess risk-taking, moral hazard and exposure to taxpayers.”

“President Trump is absolutely committed to make sure that taxpayers are not at risk for government bailouts of entities that are too big to fail,” Mnuchin said.

Trump also wants a 180-day review on FSOC designation to make sure it is “a fair and transparent process,” Mnuchin said. Four nonbanks have been designated as systemically important: AIG, GE Capital, Prudential Financial. and MetLife. The FSOC has since removed the tag on GE Capital. It is defending its label of MetLife in a federal appeals court after a federal judge struck down the designation for reasons similar to the House Republicans’ criticism. That appeal was argued in October and a decision is pending.

Critics Attack Trump Reviews

Lisa Donner, executive director of Americans for Financial Reform, said in an emailed statement that getting rid of the OLA would make financial crises and bailouts more likely.

Rep. Maxine Waters (D-Calif.) referred to Trump’s actions as “two steps back to the risky financial system that brought us the Great Recession and very nearly dragged our economy into a death spiral.”

Waters is ranking member on the House Financial Services Committee, which has scheduled an April 26 hearing on a draft of Republicans’ new Dodd-Frank replacement effort, the Financial Choice Act.

The draft bill repeals the authority Dodd-Frank gave bureaucrats to bail out large financial institutions with taxpayer dollars and instead replaces it with a new chapter of the bankruptcy code. In addition, the Choice Act eliminates the government’s authority to anoint large financial institutions as too big to fail by repealing FSOC’s discretion to designate firms as systemically important.

Its chief backer, Rep. Jeb Hensarling (R-Texas), the committee’s chairman, praised Trump’s call for review of the OLA and the FSOC designation process. “He pledged to dismantle Dodd-Frank, and his actions today are another significant step towards ending the Dodd-Frank mistake that has given Washington bureaucrats more power to politically control our economy,” Hensarling said.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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