Thursday, June 15, 2017 5:59 PM PT
Trump's Treasury Dept. Takes Aim at Dodd-Frank

     (CN) - At the request of President Donald Trump, the Department of Treasury conducted a review of the U.S. financial regulatory system, and its June report blames the "obstacles" of the Dodd-Frank reforms for dragging down growth.
     The U.S. economy is still recovering from the financial crisis of 2008, and growth rate since the crisis has averaged just two percent a year, well below the average of four percent growth for economic recoveries since 1960.
     GDP is just 13 percent higher than it was in 2007, and although the stock market has enjoyed a bull run for the last seven years, wages have lagged behind, rising just four percent since 2010.
     Trump campaigned on a promise to return the U.S. to four percent annual economic growth, but many economists believe that the U.S.'s historic rate of growth was achieved through technological advances that are unlikely to be replicated in the coming decades.
     The Treasury Department's most recent report recommends that the Dodd-Frank financial reforms, implemented after the financial crisis to strengthen the banking sector and prevent potential abuses, be scaled back.
     "The implementation of Dodd-Frank during this period 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," Treasury Secretary Steven Mnuchin's report states.
     The Department acknowledges that the low-interest rate environment extended by the Federal Reserve for almost a decade has maintained an accommodative credit environment, but says lower interest rates have, at the same time, made it difficult for banks to get an adequate return on capital.
     The Federal Reserve hiked interest rates on June 14 for the fourth time since the crisis, when they dropped to near zero, but rates remain historically low. The central bank's interest in continued rate increases to control inflation is likely to conflict with Trump's economic growth ambitions.
     Residential mortgage lending, the Achilles' Heel that brought many major banks to the brink of insolvency in 2008, has rebounded especially slowly, growing only five percent since 2010. Small business lending has also been slow to recover, just now reaching to 2008 levels, according to the Treasury Department.
     "The sweeping scope of and excess costs imposed by Dodd-Frank have resulted in a slow rate of bank asset and loan growth. At the same time, banking system resources dedicated to markets and market liquidity have declined, in large part due to regulatory changes. Finding the correct regulatory balance impacting market liquidity and the extension of credit to consumers and businesses is required to fuel economic growth," the report says.
     Mnuchin acknowledges the need to promote consumer safety and financial stability, but asserts that the government's current oversight of banks is overly burdensome, especially for smaller entities like credit unions.
     His report recommends that banks with less than $10 billion in assets be exempt from the Volcker Rule, named after the conservative former Fed Chairman, which prohibits banks from using deposits to make trades on its own account.
     "The Volcker Rule requires substantial amendment. Its implementation has hindered market-making functions necessary to ensure a healthy level of market liquidity," Mnuchin says.
     The report also takes special aim at the Consumer Financial Protection Board, an agency established by the Dodd-Frank Act and strongly supported by Sen. Elizabeth Warren. It devotes 13 pages of the report to the unchecked "abuses and excesses" of the agency's regulatory power.
     "The CFPB was created to pursue an important mission, but its unaccountable structure and unduly broad regulatory powers have led to regulatory abuses and excesses. The CFPB's approach to enforcement and rulemaking has hindered consumer choice and access to credit, limited innovation, and imposed undue compliance burdens, particularly on small institutions," the report states.
     In order to "make the CFPB more accountable to the President, Congress, and the American people," the Department recommended making the agency's independent director removable at-will by the President and to make it funded through the annual appropriations process, so that it answers to Congress, rather than receiving funding from the Federal Reserve system.
     These reforms would bring the agency completely under the control of Trump and the Republican-led Congress, which both strongly oppose its very existence.
     The report includes an 18-page appendix with a long list of regulations it recommends scaling back or eliminating altogether.
     Less than half of the proposed changes would require an act of Congress, as many of the current regulatory requirements are controlled by the financial regulatory agencies, including the Federal Reserve Board, the FDIC, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. These agencies spent much of the last seven years writing and implementing the rules promulgated by Dodd-Frank.
     Trump has already replaced the Chair of the SEC with his own appointee, Jay Clayton, after Chair Mary Jo White voluntarily stepped down. The administration may seek to replace Federal Reserve Chair Janet Yellen, an Obama appointee, with an appointee of the President's choosing when her term expires in 2018.
     The Securities Industry and Financial Markets Association (SIFMA) commended Mnuchin's review of the current banking regulations.
     "Given the multitude of regulatory initiatives over the last decade alone, notwithstanding the decades prior, the time for a comprehensive review is due and we look forward to reviewing the Treasury's report," SIFMA said in a statement.