President Trump set forth the Administration’s Core Principals for Regulating the U.S. Financial System in an Executive Order, dated February 3, 2017. There is a lot to like in these core principles and it bodes well for a thoughtful review of the Dodd Frank Act.
A number of the principles echo the original Dodd Frank legislation and actions taken by the Obama Administration. For example, the first principle seeks to “empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth.” The new Department of Labor regulation imposing a fiduciary duty upon stock brokers is designed to do just that, even though the Trump Administration apparently wants to replace it.
A law requiring brokers to have the best interest of Americans saving for retirement is certainly empowering and doesn’t compromise their independent financial decisions. It just precludes brokers from ignoring their best interest.
The second principle is “to prevent taxpayer-funded bailouts.” Well, last I looked, that is what the Dodd Frank Act mandates. See my recent post about Dodd Frank.
The third principle is to foster vibrant financial markets through “rigorous regulatory impact analysis that addresses systemic risk.” Who could argue with that? And by the way, the federal banking agencies since the crisis have been imposing rigorous stress tests to assess whether the country’s largest banks can withstand a shock such as the one in September 2008, when Lehman Brothers failed and the government had to bail out AIG.
The rest of the six principles are all laudable, including “to make regulation efficient, effective, and appropriately tailored.” If we want to make financial regulation more efficient we have to simplify the Dodd Frank and other regulations. The federal banking agencies have done a great job of carrying out Congress’s directives in Dodd Frank to address proprietary trading, credit-risk retention and other directives. They are overly complicated because Congress failed to do the hard work itself to provide bright-line rules that lend certainty and stability to the system.
Congress did this in the 1930s in addressing the Great Depression and there is no reason it can’t do the same now. The simple fact is that a lot of the complicated regulation we have today could be dispatched by simply imposing much higher leverage-capital requirements on our largest banks and doing away with risk based capital. There are proposals on Capitol Hill right now to do just that, including the Choice Act sponsored by Chairman of the House Financial Committee Jeb Hensarling.