House Financial Services Committee Jeb Hensarling's regulatory reform bill is likely to be the starting point for discussions, but many of its provisions would be difficult for expected Senate Banking Committee Chairman Mike Crapo to get through his panel.
House Financial Services Committee Jeb Hensarling's regulatory reform bill is likely to be the starting point for discussions, but many of its provisions would be difficult for expected Senate Banking Committee Chairman Mike Crapo to get through his panel. Images: Bloomberg News

Since the Dodd-Frank Act was passed in 2010, bank industry representatives have confidently predicted that the next year would bring significant changes, only to see their hopes dashed amid partisan divisions over proposed fixes. Until now.

2017 is shaping up to be the year in which sizable changes are finally enacted, thanks to Republican victories in the White House, House and Senate.

But that does not mean it's going to be easy — or that a complete rollback of the financial reform law is in the cards. Washington insiders and analysts note that the Republican majority in the Senate remains razor thin, and other issues like tax reform or infrastructure may take precedence.

"I don't that think they are going to be able to just rip it out root and branch. That would be very difficult to do and they would have to spend a lot of political capital to do that," said Brian Knight, a senior research fellow at the Mercatus Center at George Mason University.

Brian Gardner, a policy analyst at Keefe, Bruyette & Woods, agreed.

"There is a very ambitious agenda on tap and there are only so many hours in the day," he said. "Not only is Congress going to have to consider the legislative agenda that is planned for early next year, but the Senate is going to have to deal with an enormous number of nominations."

So rather than dismantling Dodd-Frank in one fell swoop, Republicans are likely to deploy a multipronged strategy that attacks the law in stages. Below are four ways that Republicans can start to revamp the financial reform law:


New leadership at the financial regulators will be the first, and perhaps the most effective, way to alter the course of regulation.

"I expect there to be some sort of directive to reduce regulatory burden on your own at the agency level," said Oliver Ireland, a partner at Morison & Foerster.

Former Securities and Exchange Commission Chairman Paul Atkins — a known opponent of Dodd-Frank — is heading the Trump transition team's assessment of the independent financial agency efforts and will play a major role in guiding their future.

In total, there are 34 Senate-confirmable positions at the federal financial regulators that are currently being held by 28 people, according to a Bipartisan Policy Center analysis. The discrepancy comes from the fact that the heads of some of the agencies need to be confirmed twice, once as a board member and then again as either a chair or vice chair.

Justin Schardin, director of BPC's Financial Regulatory Reform Initiative who did the analysis, said in a note that "President-elect Trump should be able to fill most of these agencies with his appointees by the end of 2017."

Senate Democrats ended the filibuster for most nominations after Republicans blocked President Obama's picks, so they are likely to be ineffectual in denying Trump choices such as Treasury Secretary-designate Steven Mnuchin, a former Goldman Sachs executive. But they can still slow down the process.

"While the filibuster is gone on those nominations, the 30-hour debate requirement is not, and I think Democrats, depending on the nominee, are going to slow walk some things," said Gardner.

Regardless, the heads of the federal regulators can quickly change the direction of an agency. The Federal Reserve Board has two open governor positions and a member from the board of governors can be selected to fill the vacant vice chair of supervision position. That latter role would give the new administration a way to quickly change banking regulation.

A Trump-appointed "vice chairman for regulation at the Fed … would change the direction of their regulatory policy pretty substantially and would draw into question the continuation of [current Fed] Gov. Daniel Tarullo as the main driver at the Fed," said Edward Mills, a managing director at FBR Capital Markets.

Ireland also said the way Democrats structured a number of the agencies during the writing of Dodd-Frank may come back to haunt them. The Consumer Financial Protection Bureau is headed by a single director rather than a board, while the Treasury Secretary was given chairmanship of the Financial Stability Oversight Council, an interagency council.

"You created a lot of power in those agencies and that is fine as long you control those agencies," Ireland said.

Republicans are already gunning to make the CFPB subject to congressional appropriations and change it to a five-person board, changes that Democrats have adamantly opposed.

That could change if Trump makes a move to fire CFPB Director Richard Cordray and replace him with his own pick.

"If the Republicans have a director in place by the spring, I think Democrats will ease up on their opposition to a board," said Mark Calabria, a former Senate Banking Committee staffer and director of financial regulations studies at the Cato Institute.

Cordray's term isn't up until July 2018, but a pending court case in the D.C. Circuit Court could give Trump the ability to replace Cordray at will. The court case will likely take months to play out, but Trump could also make a more controversial attempt to fire Cordray "for cause."

"You certainly could have a scenario where the Republicans have their own director for about a year before a board gets set up," said Calabria.

Congressional Review Act

The Congressional Review Act is a rarely used tool that gives Congress the ability to overturn a federal agency rule that was completed within the last 60 legislative days. The Congressional Research Service estimates that rules written as far back as June would be eligible.

However, while there are a number of rules that have been targeted, the major Dodd-Frank rulemakings would fall outside the scope of what is possible. Most major Dodd-Frank rulemakings, including those governing capital standards, the Volcker Rule, new mortgage disclosures and other steps have long since been completed.

The congressional review law could be used to halt a few CFPB rules, but some of the most controversial ones — including those governing arbitration and payday lending — haven't yet been finalized.

The Choice Act

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."

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