Unraveling Dodd-Frank Without Congress

President Trump doesn’t need Congress to begin unraveling Dodd-Frank, the complex law enacted as a bulwark against the financial excesses that triggered the 2008 crisis.

The executive orders signed by Trump earlier this month show that he won’t wait for the slow-moving legislative process to loosen Dodd-Frank restrictions on Wall Street. One order gives top regulators 120 days to prepare a report detailing which Dodd-Frank provisions aren’t working. In the other, he instructed the acting Labor secretary to delay a rule requiring financial advisers who handle retirement accounts to work solely in the interest of their clients.

Over time, Trump’s ability to fine-tune regulation through his agency chiefs will grow as he directs the biggest turnover in leadership at financial regulatory agencies since Dodd-Frank was enacted in 2010. Within the next 18 months, his appointees will take the reins the major federal regulatory agencies and will hold seven of the 10 seats on Financial Stabilization Oversight Council (FSOC), the panel of regulators charged with identifying threats to the financial system. The new chiefs will have substantial authority to change the way Dodd-Frank is enforced simply by reinterpreting its provisions and issuing new guidance. Like the president’s use of executive orders, regulators can use these tools to make changes almost immediately.

Likely targets for quick action include the FSOC’s authority to place nonbank businesses, such as insurance companies, under Federal Reserve scrutiny by designating them “systemically important.” Insurance company MetLife won a lawsuit last year to overturn its designation as a SIFI. Other big insurers, including Prudential and American International Group, are equally unhappy with the label.

Look to the new regulators to also change or delay full implementation of the Volcker Rule, the part of Dodd-Frank that limits the ability of banks to make riskier investments with their own money. Steven Mnuchin, new US treasury secretary, has expressed concern that Volcker limits market liquidity, and has suggested that banks need greater flexibility than it allows. Banks may also benefit from an increase in Dodd-Frank’s $50 billion asset threshold, which automatically designates them as “systemically important.”

By acting through appointees’ reinterpretation and guidance authority, the Trump administration could fine-tune Dodd-Frank until it is, in essence, no longer Dodd-Frank. Regulators used a nearly identical process to enervate the Glass-Steagall Act, passed during the Great Depression to limit risk-taking by commercial banks, during the 1970s and 1980s.

But it is unlikely that banks, after spending billions of dollars to comply with Dodd-Frank, really want a thorough gutting or a replacement, such as the Financial Choice Act, which will impose new compliance costs. What they clearly do want is a relaxation of the parts they consider most onerous. The administration can accomplish many of these changes long before Congress acts.

The president and his new regulators should not limit their focus to loosening regulation. They also should take a step back and consider how they can add coherence and efficiency to the Dodd-Frank framework. New agency chiefs can apply fresh eyes to its Byzantine layers.

Last year a General Accounting Office study found that Dodd-Frank had done little to clarify the “complex and fragmented U.S. regulatory structure” and left oversight spread over many agencies. The GAO asked Congress to consider changes that would, among other things, improve coordination and reduce overlap. Some of these matters, surely, can be addressed by the administration informally clarifying who does what, while Congress works on permanent solutions. If the administration, or Congress, merely relaxes enforcement without addressing the weaknesses of the structure, they will have wasted their time.

The original version of this blog can be found on The Hill