Regulatory Release

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, and President Obama signed it into law. The legislation, more than 2,000 pages long, imposed cumbersome regulations on financial institutions, which the bill’s authors took to be responsible for the 2008 financial crisis and the consequent recession. The law also established the Consumer Financial Protection Bureau, or CFPB, an advocacy agency for consumers that, to no one’s surprise, quickly turned into a Naderite anti-corporation attack dog.

Complicated laws passed in the middle of a crisis are guaranteed to make things worse in the long run, and so Dodd-Frank proved. The Democrats, who controlled both House and Senate in 2010, took the blinkered view that the financial crisis had come about exclusively thanks to the unregulated excesses of the private-sector financial industry; regulating that industry was, for them, the only rational response. The law thus deprived the market of liquidity in the middle of a recession—with predictable results.

The Democrats ignored two important points. First, the role of the federal government itself: Government-backed mortgage giants Freddie Mac and Fannie Mae—then as now boasting powerful allies in Congress—encouraged precisely the sort of risky and foolish loans that led directly to the housing-market collapse and attendant financial meltdown. Second, what many of the investment banks did was already illegal: “cooking the books,” to use the popular term. To that extent, it was an enforcement problem, not a regulatory one. Greater regulation of investment banks largely missed the point—though it allowed powerful Democrats in Congress to blame someone other than themselves for the crisis. (The bill’s authors, Chris Dodd of Connecticut and Barney Frank of Massachusetts, both had a long history of encouraging Fannie and Freddie’s worst practices.) One of the law’s further follies is that it shackled small and mid-sized banks with the same provisions despite the fact that they had nothing to do with the financial crisis.

This week Congress partially repealed Dodd-Frank. President Trump, who vowed upon taking office to do a “big number” on Dodd-Frank, signed the bill on May 24. The Senate passed its version with the help of 17 Democrats. In the House, 33 Democrats joined Republicans. This is an extraordinary admission on the part of members of Barack Obama’s party that his signature financial reform was a failure.

Among the aims of Dodd-Frank was to prevent banks from becoming “too big to fail,” the phenomenon in which top-tier institutions grow so immense that the government, and thus the taxpayer, has no choice but to bail them out or risk global meltdown. Dodd-Frank achieved the opposite. By shackling all U.S. banks with the same onerous regulations, the law enabled what economists call “regulatory capture.” The big banks had the resources to cope with the new rules and remain competitive; the smaller ones did not. In essence Democrats, in a misbegotten effort to prevent large financial firms from becoming “too big to fail,” simply made them bigger.

Banks with over $50 billion in assets were all treated the same by Dodd-Frank. So for instance the SVB Financial Group with $53.5 billion in total assets is bound by the same regulations, with commensurately high compliance costs, as J.P. Morgan Chase & Co, with its $2.5 trillion in total assets. The new law rectifies that imbalance by increasing the threshold to $250 billion. There were around 8,400 community lenders in 2007; today there are 5,500. Small community banks and credit unions may rebound now that they no longer face the same strict regulations as those with over $250 billion. Under the new law, only 12 banks will need to abide by the stricter oversight. The solution isn’t ideal—$250 billion is an arbitrary number, and the larger banks must expend enormous resources (i.e., their clients’ money) on compliance rather than investment. But the higher threshold will help smaller banks compete.

The new reform, though, leaves far too much of Dodd-Frank’s structure in place. The egregious CFPB stays. Its mission, “to protect consumers from unfair, deceptive, or abusive practices and take action against companies that break the law,” is redundant. Numerous other federal agencies have the same function and the same powers. The CFPB has gone far beyond its statutory authority to target small and mid-sized businesses its agents believe are taking advantage of consumers—particularly local and regional banks—with the result that these institutions must spend ever more on compliance and legal counsel. The CFPB’s current head, Mick Mulvaney, is attempting to bring the agency to heel, but it’s no easy task. This magazine has called for the elimination of the CFPB before. We can only renew that call. Too many provisions of the 2010 law remain, too. But Republicans have achieved a worthy reform in repealing the worst components of a massively foolish law.