Trump issues directives that could roll back post-crisis reforms

Key Points
  • The measures will target "living wills" and the designation of which institutions pose the most systemic risk.
  • Dodd-Frank was put into place to prevent another too-big-to-fail crisis, but has come under much criticism, including from regulators at the Fed.
Fed's Powell: Some parts of Dodd-Frank 'unnecessarily burdensome'
Fed's Powell: Some parts of Dodd-Frank 'unnecessarily burdensome'

President Donald Trump signed three directives Friday aimed at unwinding regulations put into place after the financial crisis.

The moves target two key areas — "living wills" that banks must formulate to show how they would be broken up if they are in danger of failure, and the designation of what institutions will come get more intense federal scrutiny under the financial reforms.

Trump called the regulations, under the Dodd-Frank legislation, "damaging ... that failed to hold Wall Street firms accountable."

During a ceremony at the Treasury building, he also signed a measure that authorized a look into "reducing the tax burden" of Americans.

"This is such a privilege for me to sign" he said. "This is really the beginning of a whole new way of life that this country hasn't seen in really many, many years."

The banking orders "signal that the Administration will continue a push to remove key regulations that were implemented as part of the Dodd-Frank Act," analysts at FBR said in a note to clients.

President Donald Trump looks at an executive order during a signing ceremony with Treasury Secretary Steve Mnuchin at the Treasury Department in Washington, U.S., April 21, 2017.
Aaron P. Bernstein | Reuters

One part will deal with the Orderly Liquidation Authority, which aims to reduce the burden of too-big-to-fail banks that endangered the financial system during the crisis. Large institutions posed widespread risk because of their interconnected nature, and the Dodd-Frank reforms sought to establish procedures for how to pull those banks apart in the case of another crisis.

However, some nonbanks also came under the measure's umbrella. MetLife last year successfully sued to have itself removed from the list of so-called systemically important financial institutions, but American International Group and Prudential remain on the list.

AIG was a central figure in the crisis, requiring a taxpayer bailout after insurance it issued against mortgage defaults exploded and posed serious risk to the business.

"We believe in clear and effective regulation, but not regulation for its own sake," Treasury Secretary Steven Mnuchin said. "Where we can do so we will lift the burden of excessive regulation to make sure that banks can lend, small businesses can borrow and Americans' work can thrive."

Mnuchin to look at alternatives

Trump likely will order regulators to review the process used to designate SIFIs, with the result being that nonbanks will be removed from the list.

On the living will issue, Trump will instruct the Treasury Department to review the provisions that require companies either to pass muster or face having to shed businesses or raise capital.

Ultimately, the OLA provisions could be repealed and replaced with a new system.

"Systemically important banks would benefit from this change: It would decrease their compliance costs in preparing their living wills, reduce the likelihood of higher capital requirements, and prevent regulators from shutting down certain business lines," FBR said.

Trump has said that he believes Dodd-Frank is unfair, and he's targeted it for significant changes.

Mnuchin will get 180 days to report back to Trump on changes to the bank designation and living will provisions. Parts of the bankruptcy code could be used as an alternative to the living wills.

"These expected memos show a continued commitment to undo many of the changes
implemented by Dodd-Frank , and we expect ... other federal financial regulators to accelerate this process," FBR said.