While the question of whether Dodd-Frank Act should stay or go has generated headlines, it presupposes that it is possible to dismantle the law.
Since the act’s 2010 passage, 274 regulations for carrying out its mandates have been promulgated, and 116 more are in the works. In what scenario could it realistically be repealed? To do so would require 60 votes in the Senate, a threshold that is proving exceptionally difficult to attain in the current partisan environment.
Repealing all of the Dodd-Frank regulations would take a herculean administrative effort. Even if there’s the political will to make the effort, the presidential administration has limited control over independent regulatory agencies with Dodd-Frank rule-writing authority, and those agencies don’t have a vested interest in massive regulatory repeals.
The debate about repealing the law centers on two competing interests: (1) providing relief to the banking industry from crushing compliance burdens that hinder competition and reduce profitability, while (2) maintaining adequate consumer protections and preventing financial crises similar to that experienced in 2008.
Rather than asking whether Dodd-Frank should stay or go, we believe the better question is how the Dodd-Frank Act and related regulations might be reformed to meet these two competing interests. There are three key areas where regulatory reform can have the most impact:
- Modifying capital requirements and clarifying the application of the Volcker Rule
- Revising the structure of the Consumer Financial Protection Bureau (CFPB) to provide accountability for over-regulation
- Providing specific regulatory relief for smaller banks to promote financial stability
In recent months, the Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency have announced proposals to revisit the Basel III capital treatment of certain assets held by community banks and clarify the application of the Volcker Rule to certain fund investments and trading activities.
These reforms strike us as sensible. While increases in capital held by banks and other financial firms since 2008 have undoubtedly made the financial system more resilient to economic shocks and sustained downturns in asset quality, community banks do not present the same interconnectedness issues and threats to financial stability as large firms.
As such, it does not make sense to apply the same regulatory regime to community banks as large financial firms. Likewise, the extent to which proprietary trading and investments in unregistered funds by banks and bank holding companies contributed to the financial crisis of 2008 is questionable, especially when considering that many of the mortgage-backed securities that caused stress to financial firms were bank permissible securities.
In addition to administrative reforms, the courts may revise the structure of the CFPB. Litigation is pending that may force the CFPB to adopt a board structure, as opposed to a single director, or make the CFPB director terminable at the discretion of the president. Such reforms could make the CFPB more politically accountable and reign in some enforcement action excesses.
All of these changes would be welcome not only from the perspective of fairness to small financial institutions, but they would also promote financial stability.
The U.S. banking sector is more concentrated, and therefore more susceptible to instability caused by the failure of one or a small group of institutions, than in 2008. Anecdotally, our practice has shown that much of this consolidation has been caused by the burden of increased regulatory and compliance costs.
Any revisions to Dodd-Frank Act its regulations that can decrease the compliance burden on community financial institutions and decrease consolidation pressures while still promoting financial stability and maintaining strong consumer protections would be a welcome change both for community banks and the U.S. financial system as a whole.
Taylor Tipton is an associate at the law firm Baker Donelson, representing banks, bank holding companies, and investors in merger and acquisition, restructuring and recapitalization, and securities transactions. Jackie Prester is chair of the firm’s Financial Services Transactions Group, serving financial institutions, public-company clients, broker-dealers, and investment advisers.