This post is part of The Next Agenda, a series that explores the main policy challenges facing the next Congress and presidential administration on issues from immigration and infrastructure to economics and energy. Check back regularly for future installments.
As a candidate, Donald Trump laid out few specific policy proposals on financial regulation, so it is difficult to know exactly what the future of financial regulation will be under the newly elected President Trump’s administration.
Trump has made two specific financial regulatory policy proposals: a moratorium on new regulations, and the reinstatement of Glass-Steagall provisions that were ended in the 1980s and 1990s. Those two policies are in conflict with each other, at least in spirit. Trump has also argued that too much regulation is causing banks not to lend, and that as president he would “dismantle” the Dodd-Frank Act.
The new transition team has now posted a few paragraphs on financial services policy, giving us more insight into what to expect. The site states that “policy should focus on free enterprise, while protecting consumers by policing markets for force and fraud.” This suggests an approach toward consumer protection that is more like the Securities and Exchange Commission’s approach, which focuses on transparency, protecting investors from fraud, and ensuring the efficient functioning of markets, than the more active approach to protecting consumers that the Consumer Financial Protection Bureau (CFPB) has taken.
Here are five other initial predictions about what Trump’s victory means for Dodd-Frank and post-crisis financial regulatory changes:
1. Nominations will be the main battleground.
Nominating and confirming people to fill seats on financial regulatory agencies, and at the Treasury Department, are likely to be the most important moves made by the new president and Congress. Regulators have substantial authority to implement Dodd-Frank and go beyond it, which they have done in many cases. Trump’s nominees could change or roll back much of the new body of rules and regulations put into place following the crisis.
We may also see existing regulators staying on at their agencies longer than they had planned. Supreme Court justices have stayed in office to try to ensure that their replacement is named by a president more attuned to their own thinking. The prospect of seeing the work one has done at an agency since the crisis being dismantled by a replacement could provide a regulator with an incentive to postpone retirement.
2 The SIFI experiment is over.
The designation of nonbanks as systemically important financial institutions (SIFIs) has been contentious from the start, with critics charging that the process the Financial Stability Oversight Council (FSOC) uses for designating SIFIs is unfair and opaque, and that designation is a poor way to address systemic risk outside the banking sector. The Financial CHOICE Act, a comprehensive Dodd-Frank replacement bill that was approved by the House Financial Services Committee on a mostly partisan vote in September, would explicitly revoke FSOC’s ability to designate SIFIs and retroactively remove SIFI status from firms that have already been designated.
FSOC still can provide a forum for regulators to meet and coordinate their efforts, but it may not exercise authority beyond that.
In March, a federal district judge overturned the designation of MetLife as a SIFI. That case is under appeal but, even if the government wins that case later this year, a new administration with a new Treasury secretary as chair of FSOC could simply vote to “de-designate” MetLife and the other remaining SIFIs. That seems likely.
Indeed, FSOC itself may not continue as an important entity. The council still can play a valuable role in providing a forum for regulators to meet and coordinate their efforts, but it may not exercise authority beyond that.
3. The CFPB will not be the same.
The status of the CFPB has been a highly partisan issue since Dodd-Frank was passed. Republicans have generally supported turning the Bureau into a five-member bipartisan commission and taking away the agency’s independent funding in favor of congressional appropriations. Those changes could be made next year and could be made for other financial regulatory agencies too.
The related question is what happens to the rules the CFPB has already implemented—such as those on arbitration clauses, ability to repay loans, and overdrafts—and the agency’s mission going forward. Richard Cordray’s term as director doesn’t expire until 2018. A court recently ruled that the Bureau’s structure is unconstitutional because, unlike other independent regulatory agencies, the director could only be removed for cause. In effect, the ruling said that the president could remove the director for other reasons. However, many expect the Bureau to appeal that case, and it is not clear whether such an appeal would prevent Cordray from being removed prior to its being decided.
This situation highlights the pros and cons of a single director to head an agency vs. a commission structure. Single-director agencies can act more quickly, but they are also subject to sudden swings in policy when leadership changes.
4. A different approach to too-big-to-fail
Many Republicans have argued that the new Dodd-Frank authority to wind down failing financial firms makes the “too big to fail” problem permanent rather than solving it. House Republicans have already passed legislation that would repeal Dodd-Frank’s orderly liquidation authority and replaced it with a new chapter of the Bankruptcy Code specially designed for financial companies. Similar legislation stands a good chance of passage in the next Congress.
5. The United States may pull back from international engagement.
As a candidate, Trump spoke on numerous occasions about his desire to renegotiate or pull back from international agreements that he believes do not benefit the United States. He has not mentioned international financial agreements, but the broader sentiment calls into question U.S. participation in the Basel process, and participation on international bodies like the Financial Stability Board and the International Association of Insurance Commissioners.
Some European countries are signaling they may not implement portions of the new Basel rules due to a desire to boost economic growth, so there may be a precedent for the United States to step back too. The negotiations currently underway between the United States and Europe on a “covered agreement” on insurance regulation could be ended.
Financial regulatory reform remains broadly popular with voters, but there are strong disagreements between the two parties about how best to regulate Wall Street. Major changes could be in store for the post-crisis regulatory structure that has been built over the past eight years. President-elect Trump’s choice of nominees to fill key vacancies at the Treasury Department and at independent financial regulatory agencies will do much to reveal what changes he may have in mind.
KEYWORDS: 115TH CONGRESS, CONSUMER FINANCIAL PROTECTION BUREAU (CFPB), DEPARTMENT OF TREASURY, DODD-FRANK ACT, DONALD TRUMP, FINANCIAL STABILITY BOARD, FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC), GLASS-STEAGALL ACT, HOUSE FINANCIAL SERVICES COMMITTEE, RICHARD CORDRAY, SECURITIES AND EXCHANGE COMMISSION (SEC), SIFIS, THE NEXT AGENDA SERIES, TOO BIG TO FAIL