Economy / Politics

Repeal and Replace… Dodd-Frank?

On January 30th, 2016 President Donald Trump, ten days settled into his new Pennsylvania Avenue home, exclaimed during a meeting with small business owners, “Dodd-Frank is a disaster. We’re going to be doing a big number on Dodd-Frank.” The extensive financial reform law put in place by Democrats has been scorned by Republicans since its inception, and now that they possess control of both the White House and Congress, they can finally do something about it.

Republicans universally agree that something must be done about the law. GOP lawmakers believe that Dodd-Frank presents an abundancy of problems, and they are equipped with a substantial amount of evidence to back it up. They can point to the extreme compliance costs with the law such as it costing $36 billion in final rule costs and 73 million paperwork hours. There remain dozens of regulations still left to enact with the law, and this ultimately hurts the smaller banks and financial firms who cannot afford to continually abide with these regulations. This is forcing consolidation, as in 2013 it was reported that there were now the lowest number of banks in the U.S. since the Great Depression. Since Dodd-Frank’s implementation, there has been a 14.5 percent decline in revolving consumer credit, and it can be argued that the law bears some responsibility for our stagnant economic growth.

The fact of the matter is however that in today’s extreme partisan political climate, narrative supersedes factual reasoning. Democrats feel that the law was absolutely necessary to prevent a future financial crisis and to protect consumers. Dems will make the claim that those on the right are doing the bidding of  Wall Street along with the rich, and in turn will feel obliged to staunchly oppose most likely any proposal at repealing the law, rolling back regulations in the law, or possibly even making any changes to the law. Although Republicans have the White House, and both the House and Senate, Democrats have nave narrowed the gap in Congress. Addressing Dodd-Frank could prove to be a difficult task as there are currently 52 Republican Senators, and 60 votes are needed to override any potential filibuster by Senate Democrats. Here are some ways Republicans can plausibly and effectively address Dodd-Frank.

Budget Reconciliation

Budget reconciliation could prove to be an effective tool for Senate Republicans. Under budget reconciliation, law that is already in place can be challenged and changed for purposes related to the annual budget resolution. Lawmakers who attempt this strategy will have to make evident that these specific financial regulations place excessive burdens on the federal government’s checkbook, and that eliminating them will lessen costs and/or raise revenues. The nonpartisan Congressional Budget Office (CBO), is required to assess these proposals, and ultimately the Senate parliamentarian must sign off on it. Budget reconciliation has also been a strategy discussed by Republicans when it comes to repealing The Affordable Care Act.

There are a variety of Dodd-Frank provisions Republicans can seek to strip away or undermine under the budget reconciliation tool. For example; budget reconciliation could be used to eliminate the bankruptcy provision in Dodd-Frank that has the Federal Deposit Insurance Corporation (FDIC), step in when a big bank fails, along with the Department of Treasury providing temporary funding at the taxpayers’ expense. Under budget reconciliation, Republicans could prohibit regulators from swooping in during a major bank failure, citing a 2012 CBO statistic that eliminating this authority would decrease the federal deficit by $22.5billion over a decade.

Republicans also have the ability to target different bureaucratic agencies created under Dodd-Frank. The Consumer Financial Protection Bureau (CFPB), has been criticized by Republicans since its inception due to its authoritative management structure. The bureau also cannot be held accountable as it’s funded by the Fed rather than by Congress. Using budget reconciliation, Republicans could show that having Congress be in charge of the CFPB’s budget would save a significant amount, as the bureau would likely have much of its funding cut. There are other agencies established under Dodd-Frank that lawmakers could attempt to eliminate by arguing that they’re inefficient, not transparent, and that their duties are either duplicative or could be transferred to another bureaucratic agency. Popular targets for Republicans that fall under this description include the Financial Stability Oversight Council (FSOC), and the Office of Financial Research. Republicans can also attempt to weaken the Security and Exchange Commission’s (SEC), power and overall authority by stating that the added responsibilities given to the agency by Dodd-Frank requires an expansion of staff, which would cost a CBO estimated $2.5million over a ten year period. This could also lead to the dismantlement of a provision under the law which forces private-equity firms and hedge funds to register with the SEC.

Congressional Review Act

This 1996 law allows Congress 60 days to undo a newly finalized law/regulation, by introducing new legislation while only needing a majority of votes, (51 Senate votes,) along with approval from the president. The Congressional Research Service (CRS), has stated that rules sent to Congress on or after June 13, 2016 are eligible to ultmately be repealed. A major new rule that could be undone through the Congressional Review Act is new requirements put forth by the CFPB regarding prepaid debit cards. These requirements include that issuers will have to carry a standardized disclosure of the card’s monthly fee, detail charges for cash withdrawals and customer service calls, along with other activities. A requirement also proposes that overdraft fees have limits put on them, along with issuers having to offer liability protection comparable to that of credit cards. These new requirements will likely result in increased fees for prepaid debit cards.

Under the Congressional Review Act, lawmakers have the ability to undo a new derivatives rule from the Commodity Futures Trading Commission (CFTC). The rule requires financial firms to put up capital to cover derivatives transactions that haven’t yet been cleared. This requirement diminishes a financial firm’s ability to hedge their own portfolio, and as a consequence will slow down overall trading activity in markets. There are also many rules that still have not been finalized/completed under Dodd-Frank that could potentially be struck down by the Congressional Review Act. For example; there has been widespread speculation of impending regulations to provide restrictions on payday lending. While this tool may seem very effective when applied to the Dodd-Frank rules listed above, it has its limitations, as it is estimated that “only ten or so Dodd-Frank rules are vulnerable to this process.”


There has been legislation introduced by House Republicans intended to address Dodd-Frank, and ultimately serve as a replacement. The Financial Choice Act (H.R. 5983), was introduced last September by House Financial Services Chairman Jeb Hensarling. This legislation gives financial firms the opportunity to opt out of certain financial regulatory laws and oversight such as the Dodd-Frank capital requirements, if they are able to maintain a leverage ratio of ten percent. The bill also addresses the bankruptcy provisions established under Dodd-Frank by repealing the orderly liquidation authority rule which has regulators come to the rescue to unwind collapsing banks, and replace this with a “modified bankruptcy process,” for banks, which gives banks more freedom to choose the moves they make regarding bankruptcy, but also more responsibility in absorbing the consequences. The bill also eliminates the Systemically Important Financial Institution (SIFI), provision which has financial regulators classify which institutions require closer oversight.

A big piece of The Financial Choice Act comes with repealing the highly controversial Volcker Rule. The Volcker Rule restricts banks from making an array of speculative investments which are deemed as not intended to help their customers but only themselves. These includes things such as hedge funds and private equity funds, along with proprietary trading. This bill also includes a provision that requires regulators to publically disclose how they plan to conduct stress tests, which will give banks the ability to prep for them.

The bill has the intention of helping midsize banks, and overall smaller community banks, by providing “regulatory relief for them and credit unions.” The bill also wants to make it apparent that Wall Street will be held accountable as it includes provisions designed to increase punishment for illegal activity, such as the SEC being able to increase fines, and even triple its fines in certain cases.

The legislation takes on the CFPB issue by transforming its structure from a single director to a five-member bipartisan commission. The name of the CFPB would change to the Consumer Financial Opportunity Commission, which would have a more specific focus to “protect consumers and competitive markets.” The commission’s power to diminish any financial product that it labels abusive, would be stripped away, along with its ability to use its resources to collect consumer financial data. On top of these structural transformations, the bill  switches the agency’s funding from The Fed to Congress appropriating its budget. Any other financial regulator under this legislation would have to adhere to the same rules of being led by a bipartisan commissions, and having their budgets be set by congressional appropriators.

Additional pieces in this bill include an “Audit The Fed” provision which implements an outside review of the central bank. There’s also a provision included which blocks the Department of Labor from implementing its fiduciary rule, which adds oversight and regulations so that investment advisors act only in their client’s best interest.. Aside from the Choice Act, there is other Dodd-Frank related legislation which passed the House on January 5th this year, and now currently sits in the Senate entitled the REINS Act (H.R. 26). This legislation requires Congress to give a final vote on all regulations from federal agencies which they deem as being “major.”

Although this legislation may seemingly have a difficult time getting through Congress, particularly the Senate, it provides a clearer picture to what Republicans mark as pain points in the law, and which of the these points they most want to reform.