With President- elect Donald Trump soon to be in the office, many are wondering how the banking industry will be affected by his presidency. The issues of Dodd- Frank, the restructuring of Consumer Financial Protection Bureau (CFPB), Wall Street regulation, and Congress itself will pave the way for the US’s economy.
Within three weeks after his victory in the election:
1.) Trump and his posse of advisors had vowed to repeal the Dodd- Frank Act
2.) Trump had chosen Steven Mnuchin as Secretary of the Treasury
3.) Trump promised tax cuts and a $1000 bn fiscal stimulus that will pave the way for interest high rates.
The ultimate goal is to raise the economic growth above 3%. Due to Trump’s tendency of unpredictability, it is not clear whether or not Trump and his administration will be able to deliver this result. However, just a month after his victory in the election, “shares of the five big US investments gained 20-35% on the expectation of regulatory easing, a steeper yield curve, and more fee revenue from greater business activity.” The current market is allowing him the benefit of the doubt.
The Dodd-Frank Act (known as the Dodd-Frank Wall Street Reform and Consumer Protection Act) is a United States law that places regulation of the financial industry in the hands of the government. To ensure that the financial crisis of 2008 does not happen again, Barack Obama signed the Dodd- Frank act into law in 2010.
New York bankers are not expecting that the Dodd-Frank will be repealed. They feel that they are entering a period of uncertainty but remain hopeful that the Republicans’ clean sweep of the White House and both houses of Congress will bring some regulatory relief.
According to TheBanker.com “The Trump effect: what impacts will the new U.S. president have on the country’s banks?” Trump will see some success with “draining the swamp” of US financial rules but they will most likely not come from Congress. They will come from business gains that flow from an improved economy and new leadership from banking watchdogs.
The new banking watchdog
Mr. Trump filled the role of Secretary of the Treasury. His choice is Steven Mnuchin, a former Golden Sachs partner and a hedge fund investor. He co-founded Dune Capital Management and helped set up a retail bank called OneWest. In the past, Mr. Mnuchin has donated heavily to the Democrats. However, his banking career does not suggest that he will roll back the Dodd- Frank Act. Mr. Mnuchin was selected over Jeb Hensarling who was another top choice for this role.
Jeb Hensarling, who chairs the House Financial Service Committees is one of the Dodd- Frank’s Act biggest opponent. He was supporting a draft law called the Financial Choice Act that would essentially replace the post financial crisis act.
“If Mr Hensarling was selected as treasury secretary it would have been about deregulation. With Mr Mnuchin [Mr Trump has] picked someone who will compromise,” says one banker, speaking on condition of anonymity. “That tells me that regulations will clearly go the other way, but it will be balanced.”
Bankers have expressed approval at Trump’s approval of Mr. Mnuchin for secretary of treasury because he is ‘a banking professional with a business sense and not a bureaucrat without industry experience’.
Dodd- Frank Act: What will change?
Parts of the Dodd- Frank will change but those parts will be decided based on two major factors.
The revisions that are already in the pipeline. Mr. Hensarling’s Choice Act would repeal certain aspects of Dodd-Frank and excuse banks from its supervisory regime and Basel III prudential standards if they hold more capital. Separately, some regulators have recognized the need to ease rules for smaller banks.
Whether or not the revisions can be made by (Trump- appointed) regulators or must go through Congress.
Amendments to the Dodd-Frank are subjected to the filibuster process, which requires 60 votes to pass a bill. As the Republicans hold 52 seats in the Senate, these numbers are still not guaranteed. Some speculate that the bills could instead go through reconciliation, a process that avoids the filibuster process and is intended for budget-related changes.
Consumer Financial Protection Bureau
The Choice Act is targeting weakening of the Consumer Financial Protection Bureau (CFPB). “Republicans believe that as a single-person directorship that is not subject to the same budget rules, the CFPB lacks accountability and has been able to impose excessive fines. They will push for it to be converted to a board structure and funded the same way as other regulators.”
Volcker Rule’s and Wall Street
The Volcker Rule refers to part of the Dodd-Frank, originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that do not benefit their customers.
Republicans have long-sought to strip the ban on proprietary trading that is widely considered the most despised rule on Wall Street. Some regulators have suggested exempting small banks while Mr. Hensarling’s Choice Act would terminate the Volcker’s Rule, an option supported by the American Bank Association (ABA).
The five agencies that are in charge of overseeing Volcker’s rule have not yet reached an agreement on firm parameters on how long securities can be held before they are classified as proprietary trading. Under Trump’s presidency, it is expected the rule will be simplified. This includes the exemption for market making, which would improve market liquidity.
There is clearly a desire for the Volcker Rule to be weakened, “but otherwise Wall Street banks are more focused on eliminating reporting and record-keeping obligations that create great expense without enhancing safety and soundness. One banker recalls when the revenue-generator to back-office worker ratio was 5:1. Today it is about 1:10. He is hoping the numbers will start to edge back in the other direction.”
The biggest favor Mr. Trump could do for the bank sector, particularly the bigger players are to deliver on his promises of fiscal expansion and gross domestic profit (GDP) growth of 3% per year. When considered separately, a stronger economy is significantly more important than regulatory relief.
“There is probably no industry that would profit more from a general corporate tax reduction than the banking industry. For many industrial, tech and commercial companies, they already pay well below the basic rate. But banks almost always pay in the 30s,” says Mr Cohen. “So if you bring the stated rate down to the low 20s, as an industry banks could be the biggest beneficiaries.”
Trump has not mentioned financial regulation in his victory speech nor in his 100-day in office plan and any changes to supervision, regulations, and legislation would be a while. However, growth, tax cuts, and fiscal expansion on the other hand have been brought up time and time again. Fortunately for banks, it is these amends that could provide the bigger opportunity.
Author: Jessica Huynh
Myles,Danielle. “The Trump effect: what impact will the new US president have on the country’s banks?” The Banker. The Banker, 1 Jan. 2017. Web. 16 Jan 2017.
“How Will A Trump Administration Impact The Banking Industry?” The Financial Brand. The Financial Brand, 21 Dec. 2016. Web. 16 Jan. 2017.