Why Trump still faces an uphill climb to ease regulations

WASHINGTON — The financial services industry has high hopes that the Trump administration will usher in a new era of less regulation and economic growth, but President Trump, who was sworn in as the 45th president Friday, faces tough challenges to reshape financial policy.

While Republicans control both chambers of Congress, their majority remains slim in the Senate and the sea change of financial regulation ushered in over the last eight years of the Obama administration will be hard to overcome.

Trump has said deregulation will be one of his chief strategies to spur economic growth, but how he specifically plans to ease regulations still remains unclear and will likely be directed by lieutenants in his administration.

“It is hard to know what Trump’s biggest challenge on financial regulatory policy is because the specifics of what he wants to do are not clear,” said Justin Schardin, director of the financial regulatory reform initiative at the Bipartisan Policy Center.

Yet if his tone of immediacy expressed in his inaugural address extends to financial policy, his administration may try to act fast in reversing Obama’s measures.
"We will no longer accept politicians who are all talk and no action, constantly complaining but never doing anything about it. Now arrives the hour of action," Trump said in his inauguration speech Friday.

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U.S. President Donald Trump waves while walking near the White House during the 58th presidential inauguration parade in Washington, D.C., U.S., on Friday, Jan. 20, 2017. Trump became the 45th president of the United States today, in a celebration of American unity for a country that is anything but unified. Photographer: Daniel Acker/Bloomberg

Here are specific challenges he will face to enacting financial services reforms:

An emboldened Democratic minority

While Trump has the advantage of the House and Senate both in Republican control, the GOP Senate majority narrowed in the election. Republicans now hold just a 52-48 advantage, far from the 60-vote advantage they need to halt a filibuster.

This means Trump and congressional Republicans would need to sway a sizable handful of Democrats on reforms requiring legislative approval, including steps to weaken the Consumer Financial Protection Bureau, the Financial Stability Oversight Council and other conventions established by the Dodd-Frank Act.

Democrats gave a preview of their willingness to stand up to the new administration in the Senate confirmation hearing for Treasury Secretary-designate Steven Mnuchin, when members of the Finance Committee hit Mnuchin hard over the foreclosure activity at OneWest Bank, which he ran, offshore accounts and other issues.

“Where possible we expect Trump to attempt to legislate lifting of regulations that have mandates. Only the Senate 60-vote rule is a barrier to that effort,” David Kotok, chief investment officer at Cumberland Advisors, wrote in a market commentary piece.

A Democratic minority resistant to Trump’s legislative initiatives increases the significance of his appointments. Under Senate rules spearheaded by the Democrats when they controlled the Senate, confirmations require only a majority of senators’ support, leaving the minority without the option to filibuster. Republicans could also try to steer clear of the 60-vote threshold by passing reforms through budget resolutions that only require a majority.

“Nominees are going to be the most important way he can influence policy,” Schardin said. “His appointees will probably control most of the financial regulatory agencies within a year and they will be able to make major policy changes without Congress.”

Comptroller of the Currency Thomas Curry’s term will expire in April and Federal Deposit Insurance Corp. Chairman Martin Gruenberg’s term will expire in November. Trump will also be able to make appointments to the Securities and Exchange Commission and National Credit Union Administration, among other regulatory bodies. And what he decides to do with the Federal Reserve Board, where there are two open vacancies and a still-unfilled position for one of the Fed governors to be named the vice chair of supervision, will be key.

“It is kind of like a Supreme Court nomination,” said Clifford Rossi, an executive-in-residence and Tyser Teaching Fellow at the University of Maryland's business school. “When you get somebody in there that takes over that more supervisory policy role, they can wield a lot of influence without even having regulation in place.”

But others said the legislative process will likely make Senate Banking Committee Chairman Mike Crapo, R-Idaho, and the top Democrat on the committee, Sen. Sherrod Brown, D-Ohio, the likely gatekeepers for reforms.

“I don’t know if Trump is the most important person when it comes to financial services regulation,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading. “I would probably put the most important as a tie between Crapo and Brown.”

Opposition to reforming the CFPB

The Democrats could be most steadfast in opposing changes to the CFPB.

Speculation has grown that Trump will seek to remove CFPB Director Richard Cordray before his term expires in 2018, replacing Cordray with a more industry-friendly leader.

But the threshold to fire Cordray could be high, and such a move could threaten any chance Republicans have of working with Democrats on reforming Dodd-Frank. Firing Cordray would be seen as a strike on Sen. Elizabeth Warren, D-Mass., who arguably leads the progressive wing of the Democrats.

“We have been surprised by the depth of Hill Republicans' contempt for Cordray and rising support for the President-elect to fire him, ostensibly for cause,” Charles Gabriel, president at Capital Alpha Partners, wrote in a note to clients. “We are not so bold as to predict such a move, which Dems will see as a nuclear attack on liberal Sen. Liz Warren (D-Mass.), but would now be unsurprised.”

Opposition to Cordray’s removal could also come from within the agency itself; Democrats have claimed that Cordray would seek legal recourse to oppose his removal. The drumbeat for a leadership change at the bureau is getting louder with Republican Sens. Ben Sasse, R-Neb., and Mike Lee, R-Utah, requesting that Trump remove Cordray “promptly” and Democrats upping their pushback with media releases, press calls and letters.

“One of the most important aspects of financial deregulation that the Trump administration will take on is, will they try and kick Cordray out and will Cordray sue and try and hold things up?” said Rossi.

Trump may also try and rein in the bureau by subjecting its budget to the appropriations process, which would give Congress more say over the bureau, and changing the CFPB’s leadership structure from a single director to a commission.

Mnuchin endorsed the appropriations plan on Thursday during his nomination hearing.

“The biggest issue I have with the CFPB is that I don't believe they should be funded out of profits from the Federal Reserve,” he said. “I think they should be funded out of an appropriation process.”

But Democrats, including Warren and Senate Minority Leader Chuck Schumer, told reporters on a recent press call that they would oppose a commission even if it could one day limit the power of a more conservative CFPB director appointed by Trump.

A GOP-supported CFPB leader and a commission structure “are both designed to make the agency less functional,” Warren said on the call. “At some point there will be a different president, a president who is committed to standing up for the American people and at that point that president can name someone.”

The GSE logjam

Trump’s financial services agenda could face some divisions within Republican ranks in Congress.

For example, Mnuchin said in his confirmation hearing that the administration would be interested in working with both parties on a “bipartisan fix” for housing finance.

Fannie Mae and Freddie Mac “are very important entities to provide the necessary equity for housing finance and what I've committed to is I will work with both the Democrats and Republicans,” Mnuchin said.

But finding such a fix has so far eluded lawmakers.

The Senate has considered a bipartisan plan that would unwind Fannie and Freddie but retain a government backstop for the mortgage market, with support from Crapo, other Republicans and Democrats. But House Republicans have largely favored a plan that would remove the government from housing finance.

Economic uncertainty

Of course, another challenge is any potential economic or financial threat that no one sees coming that could hurt the case for deregulation. Few were able to predict the magnitude of the 2008 financial meltdown and its fallout.

And the new administration has projections for GDP growth that are lofty compared with other outlooks.

Mnuchin — the self-described point man for Trump’s tax reform push — said that the president’s tax plan is based on an expectation of between 3% and 4% annual GDP growth.

That is a far more bustling economic outlook than the 1-to-2% growth rate that the U.S. has experienced since 2008, but Mnuchin said tax reform — including lowering the corporate and overall tax rate — is a critical part of unleashing that growth.

Some bankers — notably BB&T CEO Kelly King and U.S. Bancorp’s Richard Davis — embrace that outlook and believe that Trump’s deregulatory agenda will similarly spur growth.

But the American Bankers Association’s Economic Advisory Committee forecast economic growth for 2017 at around 2.1% and in 2018 at around 2.3%.

John Heltman contributed to this article.

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Regulatory reform GSEs Finance, investment and tax-related legislation Donald Trump Richard Cordray CFPB OCC Federal Reserve
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