Dear President-Elect Trump:
You will undoubtedly receive endless advice about the issues your administration will face. As you consider the economy, I hope that your administration will assess the state of financial services regulation with five years of experience since the enactment of the Dodd-Frank Act.
While it is undisputed that federally insured institutions should be closely regulated, since the enactment of the Dodd-Frank, the cost of regulatory compliance has increased exponentially. In 2015, the American Action Forum estimated the cost of Dodd-Frank at roughly $895 billion in reduced gross domestic product, or $3,346 per working-age person between 2016 and 2025. Such costs may be warranted and appropriate, but neither the Congress nor the federal government assessed the cost of the Dodd-Frank Act either before or since its enactment.
With this backdrop, here is a checklist of seven priorities that, as a former regulator and now a practicing attorney, I believe your administration should immediately consider in the evaluation of whether the current financial regulatory system is effective and efficient, understanding the overriding importance of keeping institutions as safe and sound as possible.
Balance Costs and Benefits of Regulation
All laws and agency rulemaking should include standardized, rigorous cost benefit analyses to empirically demonstrate that the costs that they will create are reasonable when compared to their overall impact on safety and soundness and the corresponding benefits to the public. The reasonability of a governmental decision should ultimately include whether it will have a positive, negative or neutral impact on the economy.
Assess Impact of the Volcker Rule
The Volcker Rule should be re-evaluated to consider whether it should be repealed or revised. The complex restrictions that it imposes on the activities of all kinds of banking entities are adding unanticipated costs to market liquidity and capital formation, which may impact future economic growth.
Regularly Review Existing Laws, Regulations
Given the velocity of change in the financial services business, you should encourage your regulators to build a system in which no regulation sits on the books for more than five years without its continued existence being challenged and legitimized. Similarly, no new rule should be adopted without also including a built-in obsolescence date.
Develop a Coherent Financial Services Strategy
Dodd-Frank hurled regulatory spaghetti at financial institutions after the crisis on the theory that any and all increased regulation would necessarily lead to a safer and sounder financial system. It created a regulatory bias against large institutions, an operational obstacle course for community-based institutions, and a regulatory tax on growth. But it failed to provide a vision of how financial services will be permitted to be delivered in this country on a long-term basis. Financial executives deserve a clear and consistent picture of government policies so that they can steer a course to profitability.
Make Use of Real-Time Exam Tools
Effective bank regulation that has traditionally relied on annual onsite examinations should be further enhanced by supplementing the hands-on approach with state-of-the-art real-time electronic monitoring. Many businesses throughout the country value their assets and liabilities each and every day, underscoring that access to real-time data significantly improves decision-making and monitoring of safety and soundness.
Re-evaluate Regulation of Systemic Firms
The purpose and goals of the Financial Stability Oversight Council should be re-evaluated. After five years, the FSOC has designated four nonbank financial companies as "systemically important financial institutions," but only two remain as such. One sold its banking assets to avoid FSOC jurisdiction, and a federal district court invalidated FSOC's designation of another. Since anticipating and avoiding systemic financial duress is the statutory goal, if FSOC continues in some form, its time might be better spent focusing less on SIFI designations and more on developing comprehensive data and effective early warning mechanisms that can provide regulators with the opportunity to take remedial actions before the next crisis unfolds.
Streamline the Regulatory Enforcement Structure
Depending on the charter, size and locus of a bank, too many agencies are involved in the regulatory process. The Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corp., Securities and Exchange Commission, Treasury Department, Consumer Financial Protection Bureau Department and 50 state agencies and attorneys general may assert jurisdiction with regard to the same facts at the same time. While strong regulation of financial institutions is necessary, regulatory piling-on is wasteful and counterproductive.
You should ask your team to answer the following question: If we were going to build the perfect regulatory system today from scratch, what would it look like? To the extent it is different from the one we have you will have a goal to shoot for.
Thomas P. Vartanian is the chairman of the financial institutions practice at Dechert LLP, an international law firm, and a former regulatory official at two different federal banking agencies.
