12/8/2016

WhatWouldDismantlingDoddFrankMeanforBanksandConsumers?

Wharton, University of Pennsylvania

FINANCE

What Would Dismantling Dodd-Frank

Mean for Banks and Consumers?
Dec 02, 2016

North America

Business Radio, Podcasts

As the Trump administration prepares to take oce in January, many are questioning how
it might alter the regulatory regime of the U.S. nancial services industry. Among the
proposals are tweaks to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection
Act, which was a response to the 2007-2008 nancial crisis. Dodd-Frank and the agencies
set up under it aimed to make banks stronger, to help them identify risks and respond to
them sooner, and to protect consumers.
Steven Mnuchin, Trumps choice for treasury secretary, told CNBC last week that DoddFrank is way too complicated, and it cuts back lending. He said his number-one
priority on the regulatory side would be to strip back parts of Dodd-Frank that prevent
lending.
However, the overall thrust of the changes sought by Trump and Republicans in Congress
moves in the opposite direction of making banks stronger and consumers safer, according
to Wharton professor of legal studies and business ethics David Zaring and University of

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12/8/2016

WhatWouldDismantlingDoddFrankMeanforBanksandConsumers?

Michigan Law School professor Michael Barr. Barr was also formerly assistant secretary for
nancial institutions at the treasury department and one of the key architects of DoddFrank.
Zaring and Barr acknowledged that as banks have complained of being handcued by some
Dodd-Frank provisions, room exists for improvements. But they emphasized that any
reforms should, above all, aim to prevent a recurrence of the last nancial crisis. They
discussed the future of the Dodd-Frank Act on the Knowledge@Wharton show on Wharton
Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
Here are key takeaways from their discussion:
Dodd-Frank Is Delivering: According to Barr, the Dodd-Frank legislation has done a good
job in making the nancial system safer and fairer since the nancial crisis. He said the
nancial system now has more capital, the larger nancial institutions are better regulated
and there is more attention to the shadow banking system. The new and strong
Consumer Financial Protection Bureau (CFPB) has been policing the market, which was
demonstrated in its response to the recent Wells Fargo Bank scandal, he added. The last
thing we need is to roll back that progress.
Barr acknowledged that said consumers are right to be outraged that scandals like the
one involving Wells Fargo continued despite the reforms undertaken after the 2007
nancial crisis. What Wells Fargo did in taking advantage of their customers was deeply
deceptive, deeply wrong and deeply harmful, and it undermines trust in the nancial
system, he noted.
Areas for Improvement: Zaring said he would like to see a change in the structure of the
Financial Stability Oversight Council (FSOC), which looks out for systemically risky
nancial institutions. He noted that he wouldnt want a political appointee like the
Treasury secretary to chair that council. He also called for more divergent and disparate
voices in the council, unlike the current structure which has nancial regulators
appointed by the President.
According to Barr, adjustments could be made to protect community banks from the risks
and costs of additional regulation, and regulators could set out plain-language exceptions
when rules dont apply to community banks.
Greater Risks Loom: Zaring argued that three Republican proposals for tweaks to DoddFrank go in the wrong direction. One is to revoke a rule that prevents investment banks
from trading on their own account. The second is to reduce the ability of the FSOC. The
third involves eorts to change the independence of the CFPB.

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WhatWouldDismantlingDoddFrankMeanforBanksandConsumers?

[Dodd-Frank] might end up surviving more

than we might think.
David Zaring
Barr noted that the Republican proposals would mean a wholesale dismantling of really
every step taken since the nancial crisis to make the nancial system safer and fairer.
He added that instead of tweaking the law to strengthen Dodd-Frank, the Republicans
might hamstring the agencies created under the act. Thats just going to make it possible
for the next Lehman Brothers and AIG to come up outside the regulatory system and blow
up the nancial system.
Dodd-Frank Might Survive: Despite the attacks on Dodd-Frank, Zaring thought it might
end up surviving more than we might think. For one, he said U.S. banking regulators
would want to honor banks obligations to meet capital requirements to meet foreign
obligations.
Zaring said the so-called repealers that want Dodd-Frank dismantled may run into
ssures or trapdoors such as resistance from community banks, who might complain
that the changes benet big banks at their expense. He also pointed out that not all
Republicans in Congress would want to to be perceived as getting rid of reforms that
made banks stronger and the system safer for their customers.

All materials copyright of the Wharton School (http://www.wharton.upenn.edu/) of the University of

Pennsylvania (http://www.upenn.edu/).

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