During the presidential campaign, President-elect Donald Trump asserted that he would “dismantle” the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. His nominee for treasury secretary, Steven Mnuchin, began to speak out against financial reform from the moment his nomination was announced, suggesting that he would “kill” aspects of Dodd-Frank, roll back the law’s Volcker Rule against proprietary trading, and focus solely on regulating FDIC-insured banks.
Ending Dodd-Frank would be deeply misguided and likely to recreate the very conditions that led to the 2008 financial crisis, shuttered American businesses, and cost millions of Americans their jobs. The financial sector will get a nice sugar high for a few years, and then crash the economy.
But despite these looming consequences, lobbyists have sought to weaken the law for the last six years. Many Republicans in Congress have been attacking Dodd-Frank since its enactment, and have put forward a series of bills to roll it back. Just this month, the House passed legislation to remove most banks over $50 billion in size from the requirement for safety stress testing. Another House bill would block regulators from requiring global capital cushions for big insurers like AIG.
Earlier legislation rammed through the House Financial Services Committee by Representative Jeb Hensarling blocked the Financial Stability Oversight Council from designating nonbank firms like Lehman Brothers and AIG for the Federal Reserve’s regulatory supervision. The bill would also eliminate the FDIC’s ability to wind down firms like Lehman or AIG without either a bailout or a crushing blow to the financial system, block the Fed from oversight of critical nodes in the system, weaken the Securities and Exchange Commission, and undermine the Consumer Financial Protection Bureau, among other risky actions.
That approach seems to be exactly what Trump has in mind by dismantling Dodd-Frank. In doing so, the president-elect will be making three grave errors: eliminating oversight on all but the biggest, FDIC-insured banks, ending oversight of shadow banking, and gutting the consumer bureau.
While cutting back on oversight has been pitched by lobbyists as helping community banks, it has nothing to do with that. The Fed already has a graduated, tailored system of regulation, with increasing stringency, depending on the risk that the firm poses to financial stability, based on its nature, scope, size, scale, concentration, interconnectedness, and other factors. None of these apply to the 95% of banks with under $10 billion in assets, the category commonly described as community banks.
The banks that get relief under these Republican-supported bills include foreign banks, credit card banks, trust banks, and many banks of the size and type that made horrific subprime mortgage loans and failed during the financial crisis. While these aren’t the handful of the largest financial firms, they still pose substantial risks to the system.
A second big mistake would be to ignore shadow banking. The designation of systemically important, nonbank financial institutions is a cornerstone of the Dodd-Frank Act. The reason for the designation process is that such institutions were not subject to meaningful, consolidated supervision by the Fed at all. Shadow banks such as Lehman Brothers and the insurance conglomerate AIG could operate with more leverage and riskier practices and pose a risk to the financial system. Dodd-Frank established a process for bringing such firms under regulatory oversight.
Critics of designation contend that it fosters “too big to fail” by suggesting that firms would be bailed out in a crisis, but the opposite is true. Regulating systemically important firms reduces the risk that such a firm could destabilize the financial system and harm the real economy. It provides for robust supervision, capital requirements, and a mechanism to wind down such a firm in the event of crisis without exposing taxpayers or the real economy to the risks of the firm’s failure.
Lastly, we can’t let a Trump administration gut the Consumer Financial Protection Bureau. The bureau has been the target of brutal attacks by lobbyists and ideologues since its founding, but the truth is that the bureau has done a remarkably sound job bringing enforcement actions against abuses like those revealed in the Wells Fargo scandal, writing rules on mortgages and payday loans, and cleaning up bad practices in debt collection, credit reporting, and other areas. Attacks on its structure, budget, director, and authorities are a pretext for weakening consumer protections in general.
We can’t afford to develop amnesia about the causes and consequences of the financial crisis, or we’re bound to repeat our past mistakes.
Michael S. Barr is a professor of law and public policy at the University of Michigan, nonresident senior fellow at the Center for American Progress, and former assistant treasury secretary for financial institutions.