During his 2016 presidential campaign, the president-elect has promised to repeal the 2010 Dodd-Frank Act that imposed regulations on the financial industry in the aftermath of the financial crisis. “Bureaucratic red tape and Washington mandates are not the answer to improving the financial system”, the Trump team says on its website. The law, written primarily by Democrats, was never popular with Republicans and the Republican-controlled Congress might be eager to approve big revisions.
Is the era of regulations coming to an end? I don’t think so. Critics say Dodd-Frank is pinching banks’ profits by raising legal and compliance costs and is an obstacle to doing business. It has been reported that Wall Street is lining up for a prominent role in Trumps administration. So far Wall Street investors have focused on the positive aspects of pulling back on regulations as a reduction in regulatory compliance costs will bolster bank earnings and as a result bank stocks on Wall Street have risen sharply. On the other hand, advocates say Dodd-Frank has helped make the banking system safer. Many banks admit they have spent so much time and money complying with the law, they would rather keep it. In fact it has taken years to implement all of the detailed rules. Nearly all the major Dodd-Frank rules have been finalized, meaning that the Trump administration would need to draft entirely new rules to replace them. There’s the risk that firms will need to readjust to a new set of rules, after spending a fortune preparing to comply with Dodd-Frank. Instead of undertaking such a costly and controversial effort, one likely possibility is that the Trump administration and Congress would take aim at specific rules that most irritate the banks such as the Volcker rule (which creates a firewall between a bank’s consumer operations and its risky trading activities).
It is good to be mindful for overregulation. However, it should be avoided that the dismantling of Dodd-Frank would result in the weakening of a financial firm’s compliance standards, risk management framework and capital and liquidity position. Dodd-Frank requires banks to have more cash on hand for hard times, to perform “stress tests” to see how they would perform in a crisis-like scenario and to protect consumers from abusive financial services. It would be a mistake to roll back the clock on these protections.