Wall Street welcomes Trump’s shift on regulation

February 21, 2018

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It is just over a year since Donald Trump vowed to “do a big number” on Dodd-Frank, the 2010 law designed to rein in excesses on Wall Street. The new Republican administration would dismantle many of those restrictions, the president said, freeing banks to play their part in boosting growth in the world’s largest economy. So far the shift in tone has not translated into changes to the law. The full statute remains on the books and a bill to tweak certain parts of it has yet to face a vote in the Senate. But bankers, by and large, say they are happy with the new administration for three reasons. First, because of what it has not done. No major new regulations have been imposed on the banks since Mr Trump took office, which is a form of relief in itself following an avalanche of Obama-era directives. Second, the Trump administration’s Treasury department has outlined its vision for financial regulation in a series of reports focused on cutting burdens on industry. Those reports are blueprints for Trump-appointed officials at agencies such as the Federal Reserve, who have considerable leeway to write and rewrite detailed regulations mandated by law. The third boon for banks is that day-to-day supervision has become less abrasive, as the new breed of regulatory chiefs enforces existing rules differently. On the Volcker rule, for example, a Dodd-Frank provision that banned banks from making market bets using their own money, one Washington lawyer says there is now less chance of a bank “getting smacked around” if an agency finds an infringement. The change in referees has already changed the game, regardless of whether Congress rewrites any rules. “You could take any provision in [Dodd-Frank], and you could have a very strict or moderate or liberal interpretation,” says Terry Dolan, chief financial officer of US Bancorp, America’s fifth-biggest bank by assets. “Just the tone at the top has changed; it’s a little bit more pro-growth and pro-market.” The top US regulator Randal Quarles, the Fed’s Trump-appointed regulatory chief, said in his first big speech last month that it was time for greater “efficiency, transparency and simplicity”. The Fed had begun work on creating a new Volcker rule, he noted, and was exploring rewriting leverage requirements for large banks. President Donald Trump signed an executive order to review the 2010 Dodd-Frank law on Wall Street reform © Reuters More signs of regime change are emerging from the Consumer Financial Protection Bureau, where acting chief Mick Mulvaney has disavowed the legacy of the agency’s first director, Richard Cordray. In the CFPB’s five-year plan released last week — a report less than half the length of the previous one — it stressed that it would work to monitor compliance with existing laws, rather than proposing or in effect imposing new ones through formal rulemaking or aggressive use of enforcement. “The CFPB has made it abundantly clear it will scale back its activities and operations,” says Charles Horn, partner at Morgan Lewis in Washington. Less remarked-upon but equally significant are moves from the Office of the Comptroller of the Currency, an independent bureau of the US Treasury Department that charters, regulates and supervises all national banks as well as foreign banks. Under the leadership of Joseph Otting, a former chief executive of OneWest Bank and a close ally of Steven Mnuchin, the Treasury secretary, the agency has taken a series of bank-friendly steps. One is in the interpretation of the Community Reinvestment Act (CRA), a 41 year-old law aimed at making sure that insured banks meet the credit needs of the communities in which they are chartered. Recommended White House plans to scale back powers and budget of CFPB Opinion: Start preparing for the next financial crisis now New Fed regulatory chief eyes shift in US bank stress tests Last October the OCC said it would no longer consider violations of other laws unrelated to the CRA, when determining a bank’s CRA rating. That switch came six months after Wells Fargo’s rating was docked by the previous comptroller for “non-CRA performance factors” connected to its fake-account scandal. “Unlike a lot of banking law, the CRA is fairly short and amorphous and puts a lot of discretion in the hands of the regulatory agencies to define requirements,” says Warren Traiger, senior counsel at Buckley Sandler, a law firm in New York. “They can pretty much change it any way they want.” The OCC has also taken aim at its own guidance on “deposit advance” products, a form of short-term, small-dollar consumer lending. Five years ago the OCC teamed up with the Federal Deposit Insurance Corporation to say banks should ensure that customers have the ability to repay their advances. That meant applying a level of rigour to underwriting that made the loans uneconomical, says David Pommerehn, associate general counsel at the Consumer Bankers Association. The OCC has now rescinded its 2013 guidance and the FDIC may follow suit, paving the way for banks to re-enter the market. “Some segments of customers can benefit from this type of product, and we believe regulated banks are a better place for it to happen than payday lenders,” says Citizens Financial Group, which is weighing its options. Despite being less belligerent enforcers, however, regulators will not be a pushover. This year’s round of stress tests from the Federal Reserve will be tougher than previous years, with the regulator imagining bigger falls in asset prices and a deeper hit to the economy. Moreover, last month’s censure by the Fed of Wells Fargo over its fake-account scandal — which included an unprecedented cap on the bank’s size — suggests clear breaches of rules will be punished. “President Trump likes to see himself as a law-and-order guy,” says Ian Katz, analyst at Capital Alpha in Washington. “Busting big names for bad deeds is almost always good politics.” But bankers can sense that the atmosphere has shifted. Jonathan Pruzan, finance chief at Morgan Stanley, said at an industry conference in Miami last week that people at the bank “feel good about the tone and sort of the direction of travel”. “I think if we look out a year or two from now, we’ll be in a better spot,” he said.