On the heels of a Republican-led repeal and replace of the Dodd-Frank Act, the Treasury Department has released the first in a series of reports that unveil its blueprint for sweeping regulatory reforms.

The report—“A Financial System That Creates Economic Opportunities: Banks and Credit Unions,” was ordered by President Trump and issued on June 12. It recommends executive actions and regulatory changes “that can be immediately undertaken to provide much-needed relief” for businesses harmed by regulatory build-up.

Subsequent reports will focus on markets, liquidity, central clearing, financial products, asset management, and insurance.

The new Treasury Department leadership minces no words when blaming the Dodd-Frank Act for “the slowest economic recovery of the post-war period.” It created “a new set of obstacles to the recovery by imposing a series of costly regulatory requirements on banks and credit unions, most of which were either unrelated to addressing problems leading up to the financial crisis, or applied in an overly prescriptive or broad manner.”

To ensure that banks are globally competitive, while improving market liquidity, the report, overseen by Treasury Secretary Steve Mnuchin, says that a “sensible rebalancing of regulatory principles is warranted.”

As a next step, Treasury and the Trump Administration will begin working with Congress, independent regulators, the financial industry, and trade groups to implement the recommendations advocated in the report through changes to statutes, regulations and supervisory guidance.

Among the recommended actions contained in the 149-page report:

Tailoring bank regulations to the size of institutions;

establishing a “regulatory off-ramp” from capital and liquidity requirements, Dodd-Frank’s enhanced prudential standards, and the Volcker rule;

easing capital and stress-testing requirements for credit unions;

reviewing regulatory examination overlap and duplication;

reforming mortgage requirements; and

enhanced use of regulatory cost-benefit analysis.

The Consumer Financial Protection Bureau

As should be no surprise to anyone following the wish lists of Dodd-Frank critics, the CFPB a primary target.

The Bureau’s “substantive authority is unduly broad, ill defined, and susceptible to abuse,” the Treasury Department’s report says. Complaints include the CFPB’s authority to take enforcement action against any “covered person” engaged in “unfair, deceptive, or abusive acts or practices.”

“The statute defines the UDAAP standard only in broad strokes, leaving to the CFPB the authority to decide which specific practices fall within this ambiguous prohibition,” it says. The lack of clarity “is most pronounced” with respect to the prohibition on abusive acts or practices, “a relatively undeveloped legal concept.”

Despite requests from Congress and regulated parties, the CFPB has declined to provide additional guidance on the abusiveness standard and has instead followed an open-ended “facts and circumstances” approach, the authors claim.

“Our nation’s economic security is in grave danger. The report released by Treasury is an attack on protections for consumers, investors, and retirees.”

Congresswoman Maxine Waters (D-Calif.)

“It is free to pivot and adopt new interpretations whenever it identifies a practice it wishes to prohibit,” the report says. This, and other practices has led “to a retrenchment in the provision of consumer financial products and services and erosion of consumer choice.”

Also, according to the report, “excessive reliance on enforcement actions, rather than rules and guidance,” has manifested itself in the CFPB’s “habit of effectively announcing new prohibitions through enforcement actions.”

Recommendations for dealing with the Bureau hew closely to the Republican game plan, including the Financial CHOICE Act, recently passed in the House of Representatives. Among them is ensuring that regulated entities have adequate notice of CFPB interpretations of the law before subjecting them to enforcement actions. The Bureau would be required to “promulgate rules before adopting novel positions in enforcement actions.”

To create a more stable regulatory environment, the CFPB should adopt regulations that more clearly delineate its interpretation of the UDAAP standard, Treasury says. It should seek monetary sanctions only in cases in which a regulated party “had reasonable notice that its conduct was unlawful.”

The CFPB, as many other critics have demanded, should be reorganized as an independent, multi-member commission or board that is funded through the annual congressional appropriations process, Treasury says.

Financial Stability Oversight Council

The Treasury Department’s report envisions a new approach for FSOC, a multi-agency body created by the Dodd-Frank to work together on systemic threats to financial system.

It recommends that Congress expand FSOC’s authority to play a larger role in the coordination and direction of regulatory and supervisory policies. This can include giving it the authority to appoint a lead regulator on any issue on which multiple agencies may have conflicting or overlapping jurisdiction.

Volcker rule

Section 619 of Dodd-Frank, known as the “Volcker rule,” generally prohibits insured depository institutions from engaging in proprietary trading or investing in hedge funds or private equity funds.

The prohibition also applies to banks’ affiliates and holding companies, as well as certain foreign banking organizations with U.S. operations.

The report agrees, thematically, with some of the Dodd-Frank Act’s rationale. “Banks with access to the federal safety net (FDIC insurance and the Federal Reserve discount window) should not engage in speculative trading for their own account,” it says. “Insured banks that engage in proprietary trading enjoy a government-conferred advantage that invites moral hazard.”

In its design and implementation, however, the Volcker rule “has far overshot the mark,” the report says, adding that it “has spawned an extraordinarily complex and burdensome compliance regime.”

Among the reasons: the scope of firms subject to the rule’s prohibitions, the number of regulators charged with enforcement, the ambiguous definitions of key activities under the rule, and the extensive compliance programs that the rule requires firms to adopt.

The report suggests exempting smaller institutions whose failure would not pose risks to financial stability, or to firms that engage in little or no proprietary trading or covered funds activities. Any limited proprietary trading conducted by such a firm, however, would continue to be subject to supervision and examination by the banking regulators “to ensure it is conducted in a safe and sound manner.”

Banks with $10 billion or less in assets would also be exempt if they do not have substantial trading activity.

The report calls for improving regulatory coordination among the several agencies responsible for overseeing implementation of the Volcker rule. It also demands that the definition of what constitutes proprietary trading be simplified and that there be increased flexibility for market-making activities.

A long list of bank-specific recommendations is promoted by the Treasury Department.

Banks should be given greater ability to tailor their compliance programs to the particular activities engaged in by the bank and the particular risk profile of that activity.

Consideration should be given to permitting a banking entity that is sufficiently well capitalized, such that the risks posed by its proprietary trading are adequately mitigated by its capital, to opt out of the Volcker rule.

The government needs to ensure a level playing field for U.S. institutions when aligning with international standard-setting bodies.

Several options could be considered to simplify and reduce the burden on community banks, those with less than $10 billion in assets, and credit unions.

Bank regulators should explore exempting community banks from implementing the international Basel III standards. 

Regulators must streamline current regulatory reporting requirements for all community financial institutions and reassess regulatory requirements on all banking organization’s boards of directors.

The Dodd-Frank Act requires large bank holding companies (those with $50 billion or more in total consolidated assets) and non-bank financial companies designated by FSOC to prepare living wills for their rapid and orderly resolution under the U.S. Bankruptcy Code or other applicable law. The Treasury Department supports the ongoing requirements of living wills but after “properly tailoring the threshold of participation.”


The following is from a “fact sheet” released by the Treasury Department on June 12.
A Financial System That Creates Economic Opportunities Banks and Credit Unions
Community banks and credit unions are essential to driving opportunity and growth across America. The report recommends helping community banks and credit unions by:
Avoiding a one-size-fits all system by simplifying capital requirements for small and mid-sized banks and credit unions;
tailoring regulation to reduce unnecessary regulatory burden and costs to smaller financial institutions; and
allowing community and regional banks to provide more options and opportunities for Americans, particularly in rural and underserved areas,
Helping community banks and credit unions helps all Americans because increasing lending in our communities will:
Stimulate job creation, especially through increased lending to small businesses;
secure mortgage lending for more homeowners; and
modernize the Community Reinvestment Act to better align banks’ participation and measure community impact.
Establishing an America First International Policy
U.S. banks need to be more competitive to maintain America’s leadership position as the financial capital of the world. The report recommends making U.S. banks more competitive by:
Leveling the playing field for our community, mid-size and regional financial institutions to better diversify and strengthen our financial system;
fixing “too big to fail” to ensure taxpayer bailouts are a thing of the past;
strengthen global banking standards for foreign banks to match those required in the United States;
refining objectives and improving transparency in global standard-setting bodies, like the Basel Committee, to promote America’s interests;
encouraging foreign investment in the U.S. banking system;
treating foreign banking organizations (FBOs) based on the size of their U.S. assets
discourageing escalation of capital “ring-fencing” by U.S. and foreign financial institutions; and
greater recognition of home country regulations.
Source: Treasury Department

It also recommends changing the threshold for compliance with living will requirements for bank holding companies from the current threshold of $50 billion.

For the statutory, company-led annual Dodd-Frank Act stress tests, the Treasury Department advocates raising the dollar threshold of participation to $50 billion from the current threshold of $10 billion in total assets.

The report supports an off-ramp exemption for DFAST, Comprehensive Capital Analysis and Review, and certain other prudential standards for any bank that elects to maintain a sufficiently high level of capital, such as the 10 percent leverage ratio proposed by the Financial CHOICE Act.


Reactions to the Treasury Department’s regulatory worldview, of course, vary by observer.

At an unrelated press conference on June 14, Federal Reserve Chainman Janet Yellen weighed in.

“I don't think that our regulations have played an important role, at least broadly speaking, in impeding credit growth and the growth of the economy,” she said, arguing against a central theme of the report. Various statistics suggest that credit growth continues to be healthy, including among the smaller community banks that are most concerned with regulatory burden, she added.

The Treasury report “underscores the importance of capital liquidity, stress testing, and resolution planning in having a safe and sound banking system, which are views that I and my colleagues have long espoused,” Yellen added. “When it's possible to ease regulatory burden, that is something that all regulators should be looking to do. We strongly believe in the importance of tailoring our regulation to the size and complexity of institutions, and finding ways to relieve the burden for community banks.”

While there is much to admire in the report, “there is one recommendation that causes us great concern,” says Iain Murray is the Competitive Enterprise Institute’s vice president of strategy. “As long as FSOC decisions remain insulated from meaningful judicial review, our concern remains that it will have more power than any entity should have in our constitutional republic.”

His concerns echo CEI’s original complaint in its lawsuit over the constitutionality of certain provisions of the Dodd-Frank Act. It singled out the FSOC as unconstitutional, violating the Constitution’s separation of powers.

The FSOC has sweeping and unprecedented discretion to choose which nonbank financial companies to designate as “systemically important.”

“That designation signals that the selected companies have the implicit backing of the federal government—and, accordingly, an unfair advantage over competitors in attracting scarce, fungible investment capital,” Murray says. “Yet the FSOC’s sweeping powers and discretion are not limited by any meaningful statutory directives.”

He says he is hopeful that the FSOC will be further addressed in subsequent reports.

U.S. Sen. Sherrod Brown (D-Ohio) blasted efforts to, in his eyes, weaken the CFPB. “When Wall Street greed goes unchecked, American taxpayers and working families pay the price,” he said.

Congresswoman Maxine Waters (D-Calif.), ranking member of the committee on financial services, was even more direct in her attack. “Our nation’s economic security is in grave danger,” she said in a statement. The report released by Treasury “is an attack on protections for consumers, investors, and retirees.”

What aspects of the Treasury report and its recommendations may ultimately have the greatest effect?

“The Treasury report recognizes the challenges of legislative changes and includes a significant number or recommendations that can be implemented by the regulatory agencies without legislation,” says Oliver Ireland, partner at law firm Morrison & Foerster. “These recommendations are the ones most likely to go forward in the near term. For example, many of the Volcker Rule recommendations can be done by the regulatory agencies without Congressional action.”

“To the extent that proposals in the CHOICE Act draw strong opposition, that may increase the focus on regulatory solutions at the agency level,” he added.