Mar 6, 2018

What's Really in the Senate's Dodd-Frank Reform Bill

J. W. Verret Senior Affiliated Scholar

The Senate is set to take up S.2155, legislation that would make a few modest changes to the Dodd-Frank Act of 2010. The House of Representatives is expected to consider a bill largely accepting the Senate's approach shortly thereafter.

The bill takes a few small steps in the right direction to open new opportunities for lending and growth. 

The most significant change in the new legislation increases the threshold for enhanced regulation by the Federal Reserve from $50 billion to $250 billion, which provides relief to a few regional banks that were never appropriate fits for the Fed’s enhanced regulatory regime in the first place.

It makes a few adjustments at the margin to rules governing the heavily regulated mortgage market. On the other hand, the government-sponsored enterprise model of our housing system that precipitated the financial crisis of 2008 remains untouched.

The bill also offers some regulatory relief to small banks. Some of them will get an 18-month examination cycle rather than a 12-month cycle. 

This legislation fits the pattern of the past hundred years of banking law, in which Congress swiftly overreacts to a financial crisis, passes dramatic restrictions on the banking sector, and then slowly eases some of the prior rules in the decades that follow. It is likely this legislation will be the first of a series of bipartisan bills to reform the financial regulatory space during the next few sessions of Congress.

It is tempting to characterize the history of banking law as a pendulum swinging back and forth, but that analogy is misleading. Regulatory accretion persists, and the "one-way ratchet" analogy often used to describe the regulatory state is more apt in banking law history.

The most constructive thing about this bill is that it will show skeptics that the Dodd-Frank Act is not holy writ, and they can support modest changes without fear. Once that happens once, it becomes easier next time.  

For the foreseeable future, the only hope for serious bank regulatory reform remains with the Trump administration's nominees currently in positions as the regulators Dodd-Frank empowered. In contrast to the modest benefits S. 2155 will offer, Federal Reserve Vice Chairman Randal Quarles' recent promise to overhaul the Volcker Rule could significantly decrease the compliance costs Dodd-Frank imposes on the economy.

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