Treasury Echoes Trump: Deregulate to Improve Financial Systems

Shortly after taking office, President Trump issued an Executive Order to establish a policy for regulating the United States financial system under seven "Core Principles," and to order a report from the United States Treasury that assesses financial markets. Last week, Treasury responded with its first 150 page report on the current state of the financial system that outlines proposed regulatory changes. Treasury points the finger at the Obama administration’s 2010 enactment of Dodd-Frank for imposing regulatory requirements insufficiently tailored or coordinated among agencies, unrelated to addressing the problems leading to the great recession, and applied in an overly prescriptive manner. In no uncertain terms, the report concludes that the scope and excess costs imposed by Dodd-Frank have resulted in a slower rate of growth in the financial markets. Unsurprisingly, Treasury’s regulatory recommendations coincide with Congress’ current legislative effort at replacing Dodd-Frank with the Financial Choice Act.

To improve current inefficiencies in financial markets, Treasury recommends removal of unnecessary, overlapping and duplicative regulations and replacement with "right-size" financial regulation. Notably, Treasury recommends tailoring stress-test requirements based on the size and complexity of banks, restructuring the Consumer Financial Protection Bureau (CFPB), and requiring independent financial regulators to employ a cost-benefits analysis with respect to all future proposed regulations.

The report contains a handy chart of recommendations towards the end (Appendix B). Here are some of the cherry-picked recommendations we find particularly interesting:

• Regulatory Overlap & Duplication
• Put Office of Financial Research under Treasury, subject to appointment and removal at will by Secretary. (OFR was created by Dodd-Frank and has a Director appointed by the President, confirmed by the Senate. Its mission is to "promote financial stability by looking across the financial system to measure and analyze risks, perform essential research, and collect and standardize financial data.")
• Harmonize state and federal requirements related to cybersecurity.

• Capital & Liquidity
• Increase the current threshold for mandatory participation in company-run Dodd-Frank stress tests from $10 billion to $50 billion in total assets and eliminate the mid-year stress test.
• Create an off-ramp from cap. and liquidity, Dodd-Frank stress tests, and Volcker rule requirements for well-capitalized depository institutions.

• Community Financial Institutions
• Covers community banks, CDFIs, minority depository institutions, credit unions, and rural & agricultural lenders. Treasury recommends significant adjustments to the overall regulatory burden placed on community banking and credit unions.

• Improving the Regulatory Engagement Model
• Most everything is general in this recommendation: use a cost-benefit analysis, get rid of unnecessary requirements, and work on better relationships with regulators.
• Specifically mentioned, however, is taking a look at the Community Reinvestment Act and determining if the requirements actually serve the needs of communities. This is noted as a "priority" for the Secretary.
• Improving the Volcker Rule
• What's the Volcker Rule? Another one of Dodd-Frank's creations that restricts banks from making certain kinds of speculative investments that don't benefit their customers.
• Interesting that the recommendation is to "improve" the Volcker rule (by simplifying and providing greater flexibility) rather than eliminate it.

• Consumer Financial Protection Bureau
• Besides re-hashing the United States' position in PHH v. CFPB, the report calls for:
• Ensuring that regulated entities have certainty regarding CFPB interpretations before they are subject to enforcement actions;
• Curbing excess and abuses in investigations and enforcement;
• Reviewing their regulations more regularly and cutting ones that don't make sense;
• Improving safeguards for the complaint database;
• Repeal CFPB's supervisory authority.

• Residential Mortgage Lending
• Adjust & clarify the ATR Rule and Eliminate the QM Patch;
• Loosen standards for determining borrower debt and income levels;
• Revise points and fees cap on QM loans;
• Clarify & modify TRID;
• Improve flexibility of Loan Originator Compensation Rule;
• Delay implementation of HMDA Reporting Requirements;
• Place a moratorium on additional mortgage servicing rules;
• Make significant changes for secondary market participants.

• Small Business Lending
  • Interesting one: Repeal parts of Dodd-Frank related to fair lending data collection to ensure that small businesses can get access to capital at a reasonable cost.

Many, if not most, of the recommendations rely on Congress for implementation. So, this report is more like a preview for a movie. The good stuff is up-front and we have to watch the whole movie to see how it turns out. Given the pace of legislation in Congress, we anticipate one of the most important scenes in this movie will be the mid-term elections.