Four Ways the GOP Could Roll Back Dodd-Frank in 2017
House Financial Services Committee Chairman Jeb Hensarling is working on an updated version of a bill passed out of his panel in September that would significantly reshape the financial regulatory world and is likely to be the blueprint for a regulatory reform bill this Congress.
The legislation, called the Financial Choice Act, would allow financial institutions to opt-in to an alternative regulatory framework if they meet a 10% capital requirement.
While the bill has a good chance in the House, it is likely to face challenges in the Senate, considering that many of its provisions — including those that would revamp the CFPB — are strongly opposed by Democrats.
The "Choice Act was not a realistic legislative plan," said Gardner. "They were political documents to point out a direction in which the Republicans want to govern."
Calabria said Sen. Mike Crapo, R-Idaho, who is expected to take the reins of the Senate Banking Committee, will have to work more closely with Democrats and arrive at something closer to what Sen. Richard Shelby, R-Ala., introduced last year. That bill was more limited in its vision of reform, but it still drew opposition from Senate Democrats.
"Crapo will start with something like where Shelby was before," said Calabria of Shelby's bill, which wasn't as far reaching as Hensarling's.
A Dodd-Frank regulatory relief package has an easier path to enactment given that the GOP now controls the White House in addition to both chambers of Congress. Senate Democrats also face a tough electoral map in 2018, with more than two dozen of their number up for reelection.
There are 10 Democrats running for re-election in states that voted for Trump, including four Democrats on the banking panel and they may feel compelled to get something done so they can highlight their achievements back home.
"There will likely be an initial effort to find bipartisan initiatives and to proceed on a more regular order basis," said Timothy Jenkins, a partner at Nossaman.
However, things could quickly go south if the political environment turns hostile, he said.
"The critical litmus test will be the tenor of the first several months," he said. "It will unravel in a hurry if the Republican Leadership and administration use extreme measures to achieve partisan outcomes, including doubling down on reconciliation and potentially removing Cordray for cause. In this situation, some Dodd-Frank reform and other potential bi-partisan efforts are likely off the table."
Isaac Boltanksy, an analyst at Compass Point Research & Trading wrote in a client note that "we do not expect passage of a substantive financial services regulatory relief package until late 2017 at the earliest. We are cautious regarding the timeline given the already overburdened Congressional agenda, the persistency of the filibuster in the Senate, and our belief that the House will want to cut far deeper than the Senate."
Finally, lawmakers could turn to a process known as "reconciliation" — an adjunct to the annual budget process which directs committees to change legislation that has a budgetary impact — to make alterations to Dodd-Frank.
Changes made during this process must have a demonstrated budgetary impact, but are not subject to the filibuster, giving the GOP a chance to enact some more controversial changes.
"I do think there will be attempts to do things via budget reconciliation if for no other reason than as a stick to bring Democrats to the table," said Calabria.
When the Congressional Budget Office scored the Dodd-Frank Act, several key areas were identified as having a significant budget impact, including big bank resolutions, as well as the creation of the Financial Stability Oversight Council and the CFPB. Big bank resolutions in particular scored high because while the odds of another failure are relatively small, dissolving a large bank would be particularly costly.
Republicans could also introduce legislation that would make changes to the ability of FSOC to designate systemically important financial institutions even if the CBO ruled that such a move increases the deficit. (To compensate, lawmakers would have to find offsets in other areas to balance it out.)
But going this route also carries political risks, and would virtually guarantee that Democrats will not cooperate on other financial policy legislation.
"I think that determination of whether to pursue the reconciliation path or not is critical because I presume Congress will only get one bite at the apple," said Gardner. "It will be very difficult to change Dodd-Frank both in a reconciliation bill and regular order."