Dodd-Frank Is Here To Stay

Signed into law as a response to the Great Recession, the Dodd-Frank Wall Street Reform and Consumer Protection Act is arguably the largest piece of financial reform legislation to be passed since the New Deal. However, over the past seven years, powerful voices from the Republican establishment, such as Jeb Hensarling (R-Texas), the chairman of the House Financial Services Committee, have voiced serious concerns about the efficacy of this particular regulatory overhaul. Now, one of the law’s harshest critics sits in the Oval Office—the president having even called Dodd-Frank a “disaster” on multiple occasions. In an era of Republican governance, will Dodd-Frank be repealed? The scope of President Trump’s legislative agenda, the inconsistency between deregulation and his populist campaign rhetoric, the lack of a feasible alternative, and congressional logistics suggest that a full repeal of Dodd-Frank is unlikely.

President Donald Trump has signed more than twenty-five executive orders in his first fifty days of office. These orders tackle a variety of policy issues, ranging from the restructuring of the National Security Council to a temporary suspension of the U.S.’s refugee program. Meanwhile, in the legislative branch, Congress has been focused on the question of health care reform. On March 7, 2017, the GOP introduced its plan to repeal and replace the Affordable Care Act: the American Health Care Act. This announcement was followed by an almost immediate backlash from many Republicans, such as Rep. Mark Sanford (R-South Carolina) who told CNN he would not back the proposed bill unless changes were made. The Republican Party’s disunity on the question of health care reform, coupled with the wide scope of the executive actions taken by President Donald Trump thus far suggest that his administration lacks the bandwidth to make substantive changes to the behemoth that is Dodd-Frank.

Assuming for a moment that the Trump administration finds the time and other resources to try and take on Dodd-Frank, the next roadblock that emerges is popular support. According to the Pew Research Center, 49% of Americans believe that “the government has not gone far enough in regulating financial institutions and markets, leaving the country at risk of another financial crisis.” These men and women, Main Street residents who have little faith in the Wall Street bankers who crushed them just eight short years ago, form a crucial part of President Trump’s electoral base. Unless Dodd-Frank is replaced with an alternative that better addresses the concerns of this group, President Trump and lawmakers who actively pursue the repeal of the law could receive diminished electoral support moving forward.

Today, there are few feasible alternatives to Dodd-Frank. While on the campaign trail, President Trump suggested that the U.S. should enact a 21st Century Glass-Steagall Act. If passed, this law would separate “investment and commercial banking activities,” breaking up some of the U.S.’s largest financial institutions. This proposal, in and of itself, fails to address a number of key issues involved in the most recent financial crisis. For example, separating investment and commercial banking does not ensure that financial institutions of all types have sufficient capital to withstand major financial shocks. Moreover, this proposed separation would not provide for a streamlined resolution process of distressed firms such that bankruptcies can occur without major consequences to the global financial system as a whole.

The most feasible alternative currently available is the Financial CHOICE Act, a bill sponsored by Rep. Jeb Hensarling (R-Texas). This bill seeks to reduce government oversight of firms with sufficient capital buffers, end the designation of certain firms as Systemically Important Financial Institutions (SIFIs), replace the resolution process designed by Dodd-Frank with a new chapter of the bankruptcy code, reform the structure of the Consumer Financial Protection Bureau (CFPB), hold regulators accountable to the legislative branch via the appropriations process, enhance penalties for financial crimes, and provide regulatory relief to small firms across the nation. Although this recommendation is more substantive than the Glass-Steagall provision outlined above, it has faced major opposition in the court of public opinion. Sen. Elizabeth Warren (D-Massachusetts) called the proposal a “wet kiss” to Wall Street. Furthermore, Sen. Warren and other Democratic legislators argue that this proposal guts major regulations that have strengthened the American financial system in recent years. This lack of bipartisan backing supports the conclusion that it cannot serve as a replacement for Dodd-Frank.

Even if Republicans were able to design and introduce a feasible alternative to Dodd-Frank, there is no guarantee that such a proposal would pass in the U.S. Senate. All evidence suggests that Elizabeth Warren and other Democratic senators would fight tooth and nail to preserve Dodd-Frank. As such, Republicans would need to amass a 60 vote supermajority to avoid a filibuster and vote on the bill. There are currently 52 Republicans and 46 Democrats in the Senate. Assuming all Republican senators vote for the proposal, GOP leaders would need to find eight more votes to pass a bill that repeals Dodd-Frank. If the Democrats unite in opposition, then it is extremely unlikely that the GOP will find the support it needs. In addition, it may not be safe to assume that all of the Republicans in the Senate will support a full repeal of Dodd-Frank. Susan Collins (R-Maine) voted to support Dodd-Frank in 2012, and the chances that she would vote to repeal it are slim.

The Dodd-Frank Wall Street Reform and Consumer Protection Act has been a contentious piece of legislation ever since it was signed. Some argue that the law has strengthened our financial system and supported the most recent economic recovery; others contend that the regulations put in place have imposed unnecessary roadblocks to capital formation and sustained economic growth. Setting aside these opposing views, the evidence—beginning with the extent of Donald Trump’s legislative agenda and the continued distrust of Wall Street, moving to the lack of a feasible alternative, and ending with to the voting dynamics of the U.S. Senate—suggests that while small changes may be on the horizon, a full out repeal of Dodd-Frank is highly unlikely.