The Treasury Department has produced the proposal for financial regulatory reform that President Donald Trump ordered up four months ago, pursuant to his claim that "we're going to be doing a big number on Dodd-Frank." Because "Dodd-Frank" is the shorthand title of an overhaul of Wall Street regulation adopted by a Democratic Congress and signed by President Barack Obama in response to the panic of 2008, advocates of a more stable and resilient financial sector had been dreading Trump's attempts to roll it back.
Were their worries justified? Certainly the most concerning aspect of the Trump Treasury document is its disparagement of the various mechanisms Dodd-Frank created to ensure that financial institutions are adequately capitalized. Perhaps more than any other measure a government might take, none is more effective, in terms of reducing systemic risk, than requiring systemically important banks to hold a balance-sheet buffer large enough to withstand even a catastrophic recession. Yet the Treasury plan calls on the Federal Reserve to soften the terms of its annual "stress tests" of bank capital, or even make them biennial, ostensibly to liberate lending. No doubt tighter capital requirements may have tamped down lending, but swapping growth for stability is an acceptable trade-off in view of the disastrous buildup of risk that pre-crisis regulations permitted.