The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) ushered in the most substantial changes to the U.S. financial system since the Great Depression. The statute was 848 pages long and imposed an estimated 27,278 new restrictions—equal to 74 percent of the restrictions created by all other laws passed during the Obama administration combined! Nearly all sectors of the economy have felt Dodd-Frank’s impact, and the visionary behind one of its main provisions (CFPB) was a leading candidate for the Democratic presidential nomination (Elizabeth Warren). The changes wrought by Dodd-Frank seemed so firmly entrenched that when President Trump, shortly after taking office, called Dodd-Frank “a disaster” and promised to do a “big number” to the legislation, his statement was given little credence.
However, the last three years have demonstrated that Dodd-Frank rests on a less stable foundation than previously thought. Through the appointment process, agency rulemakings, and targeted Congressional action, the Trump administration has been remarkably effective at rolling back key provisions of Dodd-Frank. These changes have largely flown under the public’s radar, and therefore invited less scrutiny than if the administration had lobbied to repeal Dodd-Frank directly. While the general perception of policymaking within the Trump administration is that it is void of process, and therefore less effective, this perception does not apply to the practice of financial regulatory policy. Trump appointees at the Treasury Department and key regulatory agencies have put on a master class in how to systematically dismantle a regulatory edifice that not so long ago appeared unshakable.
This post highlights the process the Trump administration has followed to achieve such remarkable success. Rather than focus on every new rule or change to enforcement policy, I emphasize how the administration has utilized every tool at its disposal, beginning with executive orders, to bring about critical changes to select elements of the post-crisis regulatory regime. I conclude by placing these deregulatory efforts in a broader historical context, noting that although it is common for politicians to dial back financial regulations in hopes of juicing economic growth, rarely do these efforts occur so soon after the last financial crisis.
The Executive Branch
The assault on Dodd-Frank began in earnest in February 2016, when President Trump issued Executive Order 13772 on “Core Principles for Regulating the United States Financial System.” The Executive Order provided the intellectual scaffolding to support future deregulatory efforts. It did so by providing seven anodyne “Core Principles” that were malleable enough to later justify sweeping recommendations to the post-crisis regulatory framework. After all, who doesn’t want to “empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth” (Core Principle A) or “enable American companies to be competitive with foreign firms in domestic and foreign markets” (Core Principle D)?
The Executive Order directed the Secretary of the Treasury, in consultation with the heads of the member agencies of the Financial Stability Oversight Council (FSOC) to identify “any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.” The Treasury Department dutifully complied, and over the next two-and-a-half years, issued four reports that cover all aspects of the U.S. financial system. These reports—covering banks and credit unions; capital markets; asset management and insurance; and nonbank financials, fintech, and innovation—are comprehensive and provide unique insights into the markets they describe. They also include many recommendations that are designed to align financial regulation with the Core Principles. Each report contains an appendix that lists every recommendation, the core principle it pertains to, and whether the recommendation can be adopted by regulatory agencies or requires Congressional action. Taken as a whole, these four reports amount to an administration wish list for changes to the financial regulatory framework.
While each report contained anywhere between 60 to 97 recommendations, the Treasury Department lacks the authority to implement a single one on its own. Therefore, to implement the recommendations that require agency action, the administration needed to appoint individuals who shared their deregulatory agenda. As the saying goes, personnel is policy, and once key personnel were in place, financial regulatory policy changed quickly.
One of the first changes was to FSOC’s treatment of systemically important nonbank financial institutions (nonbank SIFIs). Under Section 113 of the Dodd-Frank Act, FSOC has the authority to determine that a nonbank financial company’s material financial distress could pose a threat to U.S. financial stability. FSOC exercised this authority in 2013 to designate AIG, GE Capital, Prudential, and MetLife as nonbank SIFIs. GE Capital’s designation was rescinded by unanimous vote in 2016, after significant asset divestitures, and MetLife was able to shed its nonbank SIFI status after winning a court challenge in 2016, which the Obama administration chose to appeal. However, in December 2017, the FSOC, now chaired by Treasury Secretary Mnuchin, decided to withdraw the appeal. Far more contentious was the 2017 decision to rescind the designation of AIG, one of the primary culprits of the financial crisis. The AIG vote was 6 to 3 in favor of rescission, with all three dissenting votes coming from Obama appointees (Richard Cordray, Director of the CFPB; Martin Gruenberg, Chairperson of the FDIC; and Mel Watt, Director of the FHFA). With the unanimous decision to rescind Prudential’s designation in 2018 – Mel Watt was the only remaining Obama appointee on FSOC at this point – no nonbanks were designated as systemically important.
FSOC was not satisfied with merely removing nonbanks from enhanced supervision by the Federal Reserve, but instead wanted to make it more challenging to designate nonbanks as SIFIs going forward. This desire was motivated by a Presidential Memorandum that required the Treasury Secretary to provide a report on whether the nonbank designation process is sufficiently fair, provides due process, and considers the costs of designation on the regulated entity, among other considerations. In December 2019, FSOC voted unanimously to finalize amendments to its interpretive guidance on designating nonbank financial companies as SIFIs. This new guidance prioritizes an activities-based approach to regulating systemic risk and indicates that entities will be designated as a nonbank SIFI “only if a potential risk or threat cannot be adequately addressed through an activities-based approach.” An activities-based approach requires FSOC to make nonbinding recommendations to primary financial regulatory agencies to apply new or heightened standards and safeguards for financial activities or practices that could create or increase systemic risks. The problem with an activities-based approach to regulating systemic risk, as others have pointed out, is that agencies may ignore FSOC’s recommendations, and it does not incorporate the interactions among different business activities within the same firm that could prove toxic.
Arguably the most consequential regulatory appointment thus far has been Randal Quarles, who joined the Federal Reserve’s Board of Governors as Vice Chair for Supervision in October 2017. Dodd-Frank created the Vice Chair for Supervision position to address perceived lapses in bank supervision prior to the crisis, and the position went unfilled during the Obama administration. Quarles, a former partner at a law firm (Davis Polk & Wardwell) that represents many of the largest banks, has moved decisively to roll back select regulations the Federal Reserve (Fed) has exclusive jurisdiction over, most notably stress testing.
In February 2019, the Fed finalized a set of changes that will increase the transparency of its annual capital stress testing program (CCAR), including providing detailed descriptions of the Fed’s models and releasing portfolios of hypothetical loans with loss rates estimated by the Fed’s models. Then, in March 2019, the Fed eliminated the qualitative objection to CCAR – the quantitative objection remained – except for firms that had only recently been subject to the annual exercise, even though no firm has failed on quantitative grounds since 2014. In contrast, one bank (Deutsche Bank USA) failed the qualitative portion as recently as 2018. Both changes to the stress testing program were recommendations in the Treasury Department’s 2017 report on banks and credit unions.
Dramatic changes to bank capital regulation were announced in early March 2020, when the Federal Reserve Board finalized a rule that introduces a “stress capital buffer,” or SCB, into the CCAR exercise. For large bank holding companies, the SCB would replace the fixed 2.5 percent risk-based capital conservation buffer with a firm-specific buffer based on the firm’s most recent stress test results. The SCB would be set equal to the maximum decline in a firm’s common equity tier 1 capital ratio under the severely adverse scenario of the supervisory stress test plus four quarters of planned common stock dividends as a percentage of risk-weighted assets. While the mechanics and implementation of the SCB are somewhat complicated, the change accomplishes a long-sought goal of the banking industry to simplify the post-crisis capital framework by integrating stress testing with point-in-time capital requirements. There are clear merits to this approach, but the SCB’s lasting impact will be determined by what it does to the overall level of capital in the banking system; unfortunately, not even the Fed can say with any precision what this will be. In a memo accompanying the final rule, Fed staff estimate that common equity for U.S. global systemically important banks (GSIBs) will increase by $46 billion, whereas for non-GSIBs with more than $100 billion in consolidated assets, common equity will decrease by $35 billion as a result of the SCB. However, these estimates are premised on firm capital distributions between 2013 and 2019, what the Fed calls “through-the-cycle.” Fed Governor Lael Brainard – an Obama appointee – objected to estimating the SCB’s impact on firms’ past actions, and using an alternative methodology, estimated that the “SCB rule will reduce current required common equity tier 1 (CET1) capital by $60 billion or 5 percent, and the rule could be expected to reduce current actual CET1 capital by $120 billion or 10 percent overall.” In objecting to the final rule, Governor Brainard noted that the rule “gives a green light for large banks to reduce their capital buffers materially, at a time when payouts have already exceeded earnings for several years on average.”
Part of Governor Brainard’s objection is based on bank-friendly changes that the final rule made to the rule that was originally put out for proposal in April 2018. Most notably, the final rule does not include a stress leverage buffer requirement, which likely would have been the binding constraint for most firms, meaning it would have restricted the permissible amount of a firm’s dividends and share buybacks. The final rule also allows firms to increase their planned capital distributions beyond what is included in their capital plans without getting approval from the Fed and does not require firms to incorporate a material business plan change, like a merger or acquisition, in the calculation of their SCB requirement. While it is too early to assess the full impact of the SCB, there is good reason to suspect that these changes will benefit the largest banks and weaken the system’s overall resilience.
Governor Quarles has ambitions beyond changing capital regulation and stress testing. In a January 2020 speech, Quarles recommended sweeping changes to the nature of bank supervision, including: (1) publishing the internal procedural materials that the Fed uses to supervise large firms; (2) putting supervisory guidance out for public comment; and (3) adopting a rule clarifying how the Fed uses supervisory guidance (Quarles recommends that such a rule should confirm that guidance is not binding and “non-compliance” with guidance may not form the basis for an enforcement action). Implementing these recommendations will require a majority vote of the Board of Governors – Governor Brainard will likely dissent – but if they pass, bank supervisors will be left with far fewer tools to force changes within individual banks and the banking system as a whole.
Personnel changes have also shaken up the Consumer Financial Protection Bureau (CFPB), which was first envisioned by Elizabeth Warren while she was a law professor and was created by Dodd-Frank. When Obama-appointee Richard Cordray stepped down as the first Director of the CFPB in November 2017, President Trump appointed the then-head of the Office of Management and Budget and noted CFPB critic, Mick Mulvaney, as interim Director. Mulvaney set about making immediate changes at the agency, beginning with its name, which Mulvaney wanted to change to the Bureau of Consumer Financial Protection. In a memo to Bureau employees, Mulvaney urged “humility and prudence” and vowed that the agency will no longer “push the envelope” when it comes to fulfilling its mission. Mulvaney and the current CFPB director, Kathy Kraninger, have made good on this vow by dialing back enforcement actions and scuttling a proposed rule aimed at cracking down on the payday lending industry. The Trump administration has also embraced original Republican party critiques that the CFPB’s structure – a single Presidentially appointed Director removable only for-cause – “renders the CFPB less politically accountable than other agencies” and is therefore unconstitutional. In their June 2017 report on banks and credit unions, the Treasury Department recommended that Congress amend Dodd-Frank to make the CFPB director removable-at-will, or at the very least, structure the bureau as an independent multi-member commission or board. However, rather than wait on Congress to enact this change, the administration is “using litigation instituted by a private party as a vehicle to achieve its policy objective.” In early March 2020, the Supreme Court heard oral arguments to address the constitutionality of the CFPB’s Director’s tenure of office in Seila Law v. CFPB (Seila Law). What is remarkable about this case is that the CFPB, in concert with the Solicitor General, submitted a response to the plaintiff’s petition for certiorari that urged the Supreme Court to grant the petition and to determine that the CFPB Director’s tenure is unconstitutional. If they are successful, the CFPB will have effectively weakened its own authority and helped undermine the very legislation that brought it into existence.
Many of Dodd-Frank’s provisions required multiple agencies to jointly develop a rule or regulation that implements the statute’s intent. This gave the agencies broad discretion in determining how stringent Dodd-Frank would ultimately be and provides an opportunity for ideologically aligned agency heads to water down previously finalized rules. A perfect example of this is the Volcker Rule, which was first finalized by five federal regulatory agencies in 2013. The rule was designed to prevent banks that receive federal and taxpayer backing, in the form of deposit insurance and other support, from engaging in proprietary trading and investing in hedge funds and private equity funds (covered funds). From the beginning, banks complained the rule was too confusing and reduced market liquidity. These complaints found a receptive audience with Trump appointees. In October 2019, following recommendations included in the 2017 Treasury Department report on banks and credit unions, the agencies finalized “revisions to simplify compliance requirements” relating to the Volcker rule’s proprietary trading restrictions. Then, in January 2020, the agencies released a proposed rule to modify the Volcker Rule’s covered funds provision. In both instances, the lone dissenting vote amongst the Federal Reserve’s Board of Governors was Lael Brainard, who noted, in the context of proposed changes to the covered funds restrictions, that the agencies were subverting the will of Congress:
“The proposal opens the door for firms to invest without limit in venture capital funds and credit funds. The proposal suggests that these funds do not raise concerns about banks’ involvement in risky activity that the Volcker rule was intended to address. To the contrary, it is clear why Congress legislated the Volcker rule to limit these activities.”
As the four Treasury Department reports make evident, not all the Trump administration’s desired changes to Dodd-Frank can be accomplished through agency action. The more substantive changes require Congressional action, and Congress partially obliged with the “Economic Growth, Regulatory Relief, and Consumer Protection Act” (EGRRCPA), which passed with bipartisan support in May 2018. Broadly framed as providing regulatory relief to community banks, EGRRCPA was the first major piece of legislation to rebalance the financial regulatory landscape since Dodd-Frank. The act’s most substantive provision was a change to the so-called “SIFI threshold,” from $50 billion in total consolidated assets to $250 billion, while giving the Federal Reserve discretion to apply enhanced prudential standards to any firm with $100 billion or more in consolidated assets. The act also provided for a community bank leverage ratio off-ramp, meaning that banks with less than $10 billion in consolidated assets that maintain a tier 1 leverage ratio of greater than 9 percent are released from complying with otherwise applicable capital requirements and standards. Finally, the act required municipal securities to count as High Quality Liquid Assets for purposes of calculating the Liquidity Coverage Ratio and provides leverage ratio relief for certain custodial banks.
Per the discretion given to it by EGRRCPA, the Federal Reserve issued final rules in October 2019, that sort “banks with $100 billion or more in total assets into four different categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure.” U.S. GSIBs receive no relief, but the Fed’s rules provide significant relief to all other banks with more than $100 billion in total consolidated assets. In the press release announcing the new rules, the Fed estimated “that the changes in the aggregate will result in a 0.6 percent decrease in required capital and a reduction of 2 percent of required liquid assets for all banks with assets of $100 billion or more.” Once again, Governor Brainerd dissented from these changes, acerbically noting that:
“Today’s actions go beyond what is required by law and weaken the safeguards at the core of the system before they have been tested through a full cycle. At a time when the large banks are profitable and providing ample credit, I see little benefit to the banks or the system from the proposed reduction in core resilience that would justify the increased risk to financial stability in the future.”
What Does it all Mean?
Taken in isolation, any one of the previously mentioned changes provide little cause for concern. But collectively, these changes point to a clear deregulatory trend. Former Fed Governor, and chief architect of much of the post-crisis regulatory framework, Daniel Tarullo, referred to this phenomenon as “a kind of low-intensity deregulation, consisting of an accumulation of non-headline-grabbing changes and an opaque relaxation of supervisory rigor.”
History tells us that we are on familiar ground. In a 2018 IMF working paper, Jihad Dagher explored the political economy of ﬁnancial policy during ten well-known financial booms and busts, from the South Sea Bubble of 1720 to the U.S. Great Recession from 2007 to 2009. Dagher found that “episodes of ﬁnancial boom went hand in hand with a period of signiﬁcant deregulation.” When these bubbles went bust, significant political changes ensued, with the elected party “imposing tightened regulation and heightened oversight” that was often enforced by newly created institutions and bodies.
Given this history, it was only a matter of time before we once again saw procyclical government policies that boost credit expansion and weaken existing financial regulations. However, what is different about the latest episode is the speed with which it is being conducted and how close on the heels it comes to the previous crisis. Much of the deregulation that precipitated the U.S. financial crisis of 2008-09 occurred in the 1990s, six decades after they were originally imposed in the wake of the Great Depression. In contrast, the Trump administration has significantly rolled back regulations that were implemented just ten years prior!
What accounts for this remarkable turnaround in such a short period? One theory is what Dagher calls the “sentiment hypothesis” which posits that: “[T]he cyclicality of regulation can be due to voters wanting to get informed about the ﬁnancial system and the level of regulation only after crises. And that, overtime, the interest in ﬁnancial regulation wanes, allowing the latter to decay and for regulators to be captured by concentrated private interests.”
The problem with applying the sentiment hypothesis to our current predicament is that financial regulation, or the lack thereof, appears to be very much on the minds of large swaths of the U.S. electorate. Senator Bernie Sanders has largely predicated his presidential campaign on pushing back against the Wall Street greed and excess that came to define the financial crisis of 2008-09 and has frequently criticized President Trump’s coziness with financial industry leaders. But vilifying an entire industry is not the same as critiquing specific policies, and by operating with surgical precision, Trump-appointed agency heads have been able to deregulate the financial sector without providing the kind of simple talking points that play well on the campaign trail.
Until recently, the Trump administration’s deregulatory efforts appeared to be paying political dividends, with the stock market reaching an all-time high on February 19th and the President’s handling of the economy receiving a 56% approval rating – the highest point of his term – at the end of January. But deregulatory success comes at the expense of a more resilient financial system, and the recent coronavirus-induced market turmoil will be a real test for financial institutions around the world. Should we once again witness a cascading failure in the financial sector, Donald Trump will likely be a one-term president, and financial regulation will be in vogue yet again.
 The other core principles are: prevent taxpayer-funded bailouts; foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; advance American interests in international financial regulatory negotiations and meetings; make regulation efficient, effective, and appropriately tailored; and restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
 In January 2019, MetLife and the Financial Stability Oversight Council jointly filed a motion to dismiss with the U.S. Court of Appeals for the District of Columbia. See, https://www.businessinsurance.com/article/00010101/NEWS06/912318616/MetLife,-regulator-ask-for-dismissal-of-%E2%80%98too-big-to-fail%E2%80%99-case
 Specifically, a firm must participate in four CCAR exercises and successfully pass the qualitative evaluation in the fourth year to no longer be subject to a potential qualitative objection. If a firm does not pass in its fourth year, it will continue to be subject to a possible qualitative objection until it passes.
 Technically, in the Dodd-Frank Act, the agency was referred to as the Bureau of Consumer Financial Protection. However, the agency’s colloquial name and branded acronym has always been ‘CFPB’.
 The agencies are: Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Securities and Exchange Commission
 The Dodd-Frank Act required the Federal Reserve to establish enhanced prudential standards (EPS), such as resolution planning, stress testing and single counterparty credit limits (SCCL), for any BHC ≥ $50B
 These standards include applicable leverage ratios; risk-based capital ratios; and well-capitalized minimums for prompt corrective action.
 Municipal securities will be counted as a level 2B liquid asset.
 The S&P reached 3,386.15 on February 19, 2020.