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Why it won't be easy for Trump to repeal Dodd-Frank

Donald Trump
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Donald Trump

Like a number of his other grandiose campaign promises, Donald Trump likely will find that peeling apart Dodd-Frank gradually will be easier than tearing it asunder.

The president-elect pledged during the campaign to repeal the bank reforms that came about after the 2008 financial crisis, though it may be a stretch to call the promise a "cornerstone" of the potent populism on which the Republican won the presidency.

Since the election, bank stocks have rallied both on anticipation that Trump's policies would spur inflation and higher interest rates, as well as on the belief that he will roll back some of the more onerous regulations instituted with Dodd-Frank.

However, much of the voluminous act already has been implemented, making rollbacks costly, difficult to implement and, at some level, superfluous. Erasing Wall Street reforms also seems somewhat inconsistent with the core of Trump's message.

"It doesn't look good for Donald Trump the populist to be essentially disemboweling what was the principal regulatory response to the financial crisis," said Mark Hamrick, senior economic analyst at Bankrate.com. "So the question really is, if you're looking to let's say, amend Dodd-Frank, what are your goals and what do you do? You have to begin by acknowledging that there probably are very few lawmakers who thoroughly understand the law in the first place."

Indeed, the hue and cry for Dodd-Frank's repeal comes mainly from the banking system, with the belief that the law has held back lending through the broader system and penalized the community banks that had little to do with the crisis.

At the same time, big banks have only gotten bigger since the law's implementation, with the Big Four —JPMorgan Chase, Citigroup, Bank of America and Wells Fargo — now controlling about 45 percent of total bank assets.

Trump will run into some substantial political barriers in his quest to roll back the law.

Sen. Charles Schumer, the incoming Democratic leader in the upper house, vowed over the weekend to wage a spirited fight against the repeal of both Dodd-Frank and the Obamacare universal health plan.

However, rank-and-file Senate Democrats, such as Sherrod Brown of Ohio and Jon Tester of Montana, have indicated a willingness to work with Trump on certain issues, like alleviating the burden for smaller banks, according to a recent Morning Consult report.

Going a step at a time, then, could prove a better strategy.

"If you come at it from a common sense approach, there is a proverbial low-hanging fruit at the top of that list," Hamrick said. "Everybody from (Fed Chair) Janet Yellen on down has said there is a concern that those smaller financial companies have had a difficult time competing in the wake of the new law's enactment."

"There seems to be a general consensus that the Dodd-Frank bill has been overly burdensome on small community banks, with compliance costs through the roof and loan growth to small businesses and individuals (via mortgages) anemic," added Jeffrey Miller, partner at Eight Bridges Capital Management. "A revision or removal of some of the worst of the regulations, particularly for mortgages, will be very beneficial for consumers."

No less a source than Dodd-Frank author Barney Frank, the Democratic former Massachusetts congressman, said he believes the law set too low a threshold — $50 billion in assets — for banks to face increased regulatory burdens.

"That was a mistake," Frank told The Hill. "We should have made it much higher, $125 billion or more, and we should have indexed it."

Trump will have to pick his fights carefully: Changing that bar to let community and regional banks escape regulator scrutiny would be a popular measure and passable. Scrapping the Consumer Financial Protection Bureau will be more onerous, with Democrats girding for a fight.

In fact, banking analyst Dick Bove said he thinks the biggest opportunity for deregulation won't come from Congress but rather the Federal Reserve.

"There is a need for what big banks and Wall Street do for the economy. The new supposed leaders of the Trump administration appear to understand this," Bove said in a note. "Therefore, it is highly likely that banking regulations will be meaningfully eased in the next year. I still think this cannot be done by revoking Dodd-Frank. It must occur at the Fed."