The State of Financial Regulation
President Trump will deliver his inaugural State of the Union address next week, where he will outline the administration’s agenda for the coming year. After initially promising to dismantle the massive 2010 Dodd-Frank Act, the Administration opted for more moderate revisions in 2017. With other legislative priorities, such as tax reform, out of the way, President Trump should throw his weight behind reforming the financial system in 2018. Below are five financial reform priorities that the administration should champion.
- The Financial CHOICE Act
The CHOICE Act is the Republican response to Dodd-Frank. Championed by House Financial Services Chairman Rep. Jeb Hensarling (R-TX), the CHOICE Act is an expansive, common-sense reform that rolls back many of the worst provisions of Dodd-Frank while increasing the safety and soundness of the financial system.
Instead of imposing burdensome one-size-fits-all regulations on banks, as Dodd-Frank does, the CHOICE Act provides a regulatory off-ramp for banks that hold enough capital to buffer a down market. This is a common sense measure that allows banks to choose between higher capital standards or higher regulation and to tailor their business models accordingly.
The CHOICE Act also addresses the “too big to fail” problem, which Dodd-Frank has made worse through its systemically important financial institution (SIFI) designation. While this designation is meant to subject SIFI banks to increased regulation, it enshrines government bailouts and subsidizes banks’ risk-taking. The CHOICE Act will do away with the SIFI designation and the “too big to fail” problem.
- Banking Reform
Short of passing the CHOICE Act, the Trump Administration can support improvements to the “Economic Growth, Regulatory Relief and Consumer Protection Act,” introduced in 2017 by Senate Banking Chairman Mike Crapo (R-ID). The Crapo bill is a modest step in the right direction, easing Dodd-Frank regulatory requirements on community and regional banks.
The main provision of the Crapo bill is raising the asset threshold for SIFI designations from $50 billion to $250 billion. This is a good first-step reform that would potentially exempt up to 25 regional banks from inappropriate regulations. But in the long run, simply raising the threshold does not address one of the core problems with too-big-to-fail regulation: the fact that bank risk is not associated with bank size.
A better approach would be to get rid of the arbitrary asset threshold altogether. Instead, regulators should be required to consider a bank’s entire risk profile to determine whether heavy regulation is warranted. Missouri Rep. Blaine Luetkemeyer (R) introduced just such a plan—the “Systemic Risk Designation Improvement Act”—in July 2017. Integrating this approach into the Crapo legislation would greatly improve the bill.
- Rein in the Consumer Financial Protection Bureau
The Trump Administration could champion a better approach to consumer protection by abolishing the Consumer Financial Protection Bureau, an unconstitutional and aggressive federal regulator. The nineteen consumer protection statutes that the CFPB administers could then be transferred to a body such as the Federal Trade Commission, or the Bureau could be remade from scratch. If Congress does not have the appetite to abolish the Bureau outright, there are two other options for reform remain that will solve the constitutional problems of the Bureau. The first is to turn the Bureau into a standard executive agency with a director that is removable by the president. The alternative is to retain the Bureau as an independent agency, but with a multi-member, bipartisan commission.
- Reform the Government Sponsored Enterprises
2018 will mark ten years since the financial crisis that sparked the Great Recession. Astonishingly, a decade after the crisis, policies that directly contributed to the crisis, such as the two massive government sponsored enterprises, Fannie Mae and Freddie Mac, as well as legislation such as the Community Reinvestment Act, are still yet to be dealt with. Taxpayers continue to back 75 percent of newly written mortgages and as much mortgage debt today as they did during the financial crisis. Reforming government housing finance should be a top priority in 2018.
- Facilitating New Technology
The most exciting developments in finance are only just around the corner—if regulators will embrace them. However, there is currently an unwelcoming patchwork of state and federal regulations that prevent new financial technology firms from challenging dominant companies. Fortunately, the Office of the Comptroller of the Currency is considering a new federal charter for FinTech companies. If structured appropriately, this has the potential to allow innovative companies to operate in a defined legal framework without having to become fully-fledged banks. This would dramatically increase the opportunity that innovative firms have to revolutionize the financial services industry, bringing financial services in greater reach of the poor, and challenging the much derided “too big to fail” mega-banks. The Trump Administration would be wise to take a supportive, hands-off approach to the development of FinTech.