The reality of unraveling Dodd-Frank

President Trump recently reiterated his disdain for the Dodd-Frank Act, calling the financial reform law a disaster and telling small business owners that his administration will “do a big number” on it.

The problem for Trump is that he can’t do it through an executive order. He can use the bully pulpit, but to amend the law he has to go through lawmakers. There’s no quick fix.

It will be several months before the particulars of Dodd-Frank reform take shape. The alternative approach proposed by Financial Services Committee Chairman Jeb Hensarling (R-Texas) is being revised and must be approved by the House. Then it goes to the Senate, which will do its own number on the bill.

{mosads}It’s useful to think of Dodd-Frank in two parts: the Consumer Financial Protection Bureau (CFPB) and everything else. Republicans in Congress, especially the House, hate the CFPB with a passion normally reserved for ObamaCare. They view it as an advocacy regulator run amok. The CFPB debate will produce popcorn-worthy theatrics in Congress.

The bureau is also the part of Dodd-Frank where Trump and congressional Republicans have their best chance to impose major changes. The president could fire CFPB Director Richard Cordray, which would spark a Democratic conniption. A week ago, one might have supposed that the Trump White House would be reluctant to fire Cordray because of the risk of losing Democratic support on other issues, like tax reform.

But after the refugee uproar and the standoff over Cabinet confirmations, the level of cooperation between the parties has fallen from zero to subzero. There’s no good will left to lose. For legal reasons, Trump might be waiting to get his attorney general pick sworn into office before firing Cordray.

After Cordray’s fate is known, the biggest fight will be over Republican efforts to force the CFPB to go through the congressional appropriations process. The bureau now gets its money through the Federal Reserve. Switching that authority to Congress would allow Republicans to starve the CFPB. Democrats would push back hard, but Republicans may argue that overhauling the CFPB would save money and therefore is eligible for the budget reconciliation process that requires a simple Senate majority rather than 60 votes.

It’s a common misconception that banks hate the CFPB as much as House Republicans do. Though they might not say it publicly, many appreciate that the CFPB spends a lot of its time going after non-banks, especially the specialty finance firms that face less regulation and oversight than they do. It’s the non-banks that despise the CFPB.

Non-CFPB reform will be a long slog. There’s a growing consensus among Republicans and moderate Democrats that the Volcker rule, which restricts speculative investments by banks, needs to be loosened. Treasury secretary nominee Steven Mnuchin has said he doesn’t favor proprietary trading at banks, but also expressed concern that the rule might be limiting liquidity in financial markets. Negotiations in Congress will likely get bogged down on complexities like market-making and compliance. Lawmakers will be tempted to fix as much of it as they can and not rely on regulators to do so, but the more technical the details are, the harder that will be.

There’s no such thing as low-hanging fruit in Congress these days, but there’s broad support for taking some banks out of the so-called systemically important group overseen by the Federal Reserve. The minimum threshold is now $50 billion in assets, capturing banks as small as Zions and Huntington, lenders that almost no one thinks could bring down the financial system.

The challenge will be finding a threshold the parties can agree on. A bill proposed in 2015 by then-Senate Banking Committee Chairman Richard Shelby (R-Ala.) that would have raised the level to $500 billion failed to get through Congress. Republicans will have to settle for less to win Democratic support. The negotiations will probably hover between $200 billion and $350 billion.

One Dodd-Frank creation that will get its wings clipped is the Financial Stability Oversight Council (FSOC). The uber-group of regulators is scorned by Republicans for designating non-banks such as American International Group systemically important and for not being more transparent with its decision-making. Republicans could get enough support from Democrats to scale back the FSOC and force it to communicate more with companies and Congress.

Here’s the irony of Dodd-Frank reform: The big banks that supposedly would benefit the most from an overhaul aren’t very enthusiastic about it. They’ve put their firms though six years of significant operational changes, and they’re just about done complying with Dodd-Frank. What if there’s a new administration in four years? Will they have to change everything again? The banks don’t want a big number done on Dodd-Frank. They would be happy with small to medium.

Ian Katz is a director and financial policy analyst at Capital Alpha Partners, a policy research and analysis firm in Washington. He spent more than 20 years as a financial journalist, most recently covering regulatory policy at the Federal Reserve and Treasury Department for Bloomberg News.

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