How will Dodd-Frank fare now Trump’s attention has turned to banks?
The Dodd-Frank Act, brought into law in 2010, created comprehensive reforms to both curtail excessive risk-taking in financial markets and increase consumer protection. It strengthened regulatory oversight of the swaps market, moved standardised derivatives onto regulated exchanges, and mandated centralised clearing. During his campaign, the now President Trump announced that he wants to dismantle it, and his Executive Order on 3rd February somewhat paves the way towards this, which would remove perhaps the most significant financial regulation to appear since the financial crisis.
The principal political motivations behind the potential repeal are three-fold:
- Those that oppose Dodd-Frank argue that the act has exacerbated the issue of “too big to fail,” rather than reduced it
- Competition in the market could be increased by easing regulatory barriers to entry
- Balance sheet constraints on existing market participants which the act introduced should be eased to improve liquidity
While many would agree that the Dodd-Frank Act has been a financial and operational burden for banks, I believe that its repeal could never simply be a case of unwinding what has been introduced. Millions have been spent on system enhancements; new processes have been implemented and the new ways of working that Dodd-Frank mandated have, in many cases, increased efficiency and lowered risk. Indeed, before Dodd-Frank, many standardised derivative products were already being centrally cleared and today many firms voluntarily clear instruments that aren’t yet mandated by the regulator.
Rather than a wide-sweeping removal of the regulation, it seems more likely that the Trump administration will seek to carve up Dodd-Frank, removing only the areas that they see as not fit for purpose. The Financial CHOICE Act, spearheaded by Jeb Hensarling, a long-time opponent of Dodd-Frank, has been passed by the Financial Services Committee and awaits ratification by the Senate. Although not aimed solely at Dodd-Frank, it does specifically call out objectives to: remove the authority of the Financial Services Operating Committee to designate firms as systemically important; repeal rules which allow for government bailouts of failed banks; and, crucially, “unleash opportunities” by unwinding the controversial Volker Rule.
Given the challenges of implementing the much mooted health-care and tax reforms, the Trump administration might see the often lamented financial services industry as a more suitable target for transformation. Evidence of the uncertainly this is creating can already be seen, as some banks have begun to freeze their US regulatory change programmes. While no one can predict all of the changes that Trump has in store, his actions thus far suggest that the industry will not remain untouched for much longer.
If Dodd-Frank repeal does come, banks will need to assess the impact to their current operations and the potential benefits of rolling back to their 2010 state. We may find that even when the law itself is slackened, banks will endeavour to adhere to its spirit.