Treasury Secretary Steven Mnuchin said Tuesday that if he was king for a day, he would repeal the Dodd-Frank Act. But he’s not, and securing enough votes in the Senate to give Wall Street relief from the 2010 law’s sweeping constraints is difficult.
That may be one reason why Mnuchin noted that 80 percent of the “critical” proposals the Treasury Department included in its highly anticipated report on overhauling bank rules could be done without Congress. From dialing back the Volcker Rule to easing annual bank stress tests, the study released this week by the Treasury lays out scores of recommendations that can be implemented by federal agencies or through White House executive orders, Mnuchin said in testimony before the Senate Budget Committee.
Photographer: Andrew Harrer/Bloomberg
While relying on regulators is probably an easier way to change rules than Congress passing legislation, it is not clear how quickly agencies can act. Top positions at the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corp. are either unfilled or still held by Obama appointees.
In many ways, the Trump administration’s report reads like a bank wish list for revising rules that were imposed on Wall Street after the 2008 financial crisis. Here are some of the key steps that can be taken by regulators:
Wall Street has long argued that some post-crisis requirements have sapped liquidity by causing banks to retrench from markets. A key complaint is that some relatively risk-free assets such as Treasuries and cash deposited with central banks, or collateral banks set aside for derivatives customers unfairly count against lenders.
Banks have specifically cited the impact on their leverage ratios — which are meant to show how safe a lender is by measuring the amount of equity capital they have in relation to total assets. The higher the ratio, the bigger the buffer for losses before a bank goes bust.
The Trump administration called on the Federal Reserve and other regulators to free banks from having to include certain assets when calculating their leverage ratios. Such a change could incentivize banks to increase their market activity, according to the Treasury.
The Fed could move unilaterally in scrutinizing and seeking public comment on its stress testing and capital review frameworks and taking other steps in response to Treasury’s proposals for improving the transparency of the annual exercise meant to show banks could withstand a financial crisis.
The central bank also could on its own shift the Comprehensive Capital Analysis and Review to a two-year cycle, which would please banks that have complained about the cost and complexity. Congress would have to approve the major steps of exempting banks with less than $50 billion in assets and tailoring the tests to a lender’s complexity.
Undergoing the CCAR stress tests less frequently could have huge implications for banks and their investors, because lenders can’t issue dividends or buy back shares unless they get a passing grade.
The Fed and FDIC can act on their own to shift to every two years from of annually the schedule for banks to document their plans for proceeding safely through bankruptcy after a collapse. And they could also move to address banks’ demand for specific and clear guidance on what’s needed for the plans to be found credible.
Treasury’s calls to boost the asset threshold for banks to be required to provide living wills and to remove the FDIC from the process would have to be addressed by lawmakers.
The Volcker Rule
Congressional approval will be needed for key parts of Treasury’s proposal for dialing back the Dodd-Frank restrictions on banks’ proprietary trading, such as exempting lenders with less than $10 billion in assets and freeing bigger firms that aren’t subject to market risk capital rules.
Regulators on their own can help banks by giving them more flexibility when they act as market makers, tweaks in how proprietary trading is defined by the rule and more freedom on their compliance programs. Such changes would satisfy longstanding complaints of lenders such as Goldman Sachs Group Inc., which has argued that the rule has kept banks from serving customers’ needs.
Some of the toughest post-crisis constraints were international standards that forced banks to boost capital and load up on easy-to-sell assets. During the Obama administration, the Fed was extremely aggressive in implementing these strictures, a practice that came to be known as gold-plating.
The Trump administration signaled it plans to take a different approach, befitting the president’s “America First” perspective. The Treasury report criticized global banking requirements for adding “significant complexity” to the financial system. Such standards should “only be implemented” in a way that suits U.S. objectives, the Treasury said.