The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is a financial reform legislation passed by the Obama administration to decrease risks in the country’s financial system, in response to the financial crisis of 2008. In his presidential campaign, President Donald Trump vowed to repeal Dodd-Frank, and increase bank lending. The possible reasons for the Trump administration to dismantle it can be narrowed down to these Dodd-Frank creations:
The “Volcker Rule”, which prevents banks from making speculative investments that would improve self-growth. Customers are also not allowed to make benefits from them.
The “Consumer Financial Protection Bureau”, which created regulations in mortgage-servicing, debt collection, foreclosure relief services, etc.
The Trump transition team is pushing for the repeal because they believe that while the size of big banks grew even bigger, community banks and smaller financial institutions have disappeared at a rate of one per day. They also say that taxpayers are in trouble for bailing out financial firms that seemed like they were too big to fail. Investors on Wall Street see the positive aspects of the repeal —banks stocks have increased since Trump won, the KBW Nasdaq Bank Index has increased 7%.
Other pros of the repeal include:
Increasing the profit-making ability of financial firms:
Regulations will no longer harm competitiveness of U.S. financial firms compared to their foreign counterparts
Individual institutions are less safe without the constraints, but the regulations made for a more illiquid market overall
There will be no need to maintain regulatory compliance, which will lift the burdens of smaller banks and community banks (even though these smaller financial institutions played no part in the 2008 recession).
There will be lower reserve requirements, since banks can hold a lower percentage of their assets in cash, increasing the amount they’re able to hold in marketable securities. This allows unlimited bond market-making roles that banks have done traditionally, allowing banks to play the part of the market-maker. This enables prospective buyers to have an easier time finding counteracting sellers, and prospective sellers can have an easier time finding counteracting buyers.
But along with pros, there are the cons. Reducing regulations would increase bank earnings, but reduced oversight and less requirements would “result in weakening the bank’s capital and liquidity position, negative from a credit perspective (Geewax, 2016).”
“Chris Dodd and Barney Frank, former lawmakers after whom the Act was named.”
Cons of the repeal include:
Repealing the act will not prevent a reoccurrence similar to the 2008 crisis.
Consumers will not be protected by abuses that contributed to the 2008 crisis.
Each individual’s institution is less safe without the capital constraints that Dodd-Frank imposed: there was a whistleblower program that rewarded whisteblowers with 10-30% of proceeds from a litigation settlement, covered more employees by including employees of the company along with its affiliates and subsidiaries, and extended the statute of limitations for a whistleblower to bring a claim against his employers for 90-180 days after a violation is claimed
The debate on whether the current fiduciary policy has served the goals the White House set to achieve will continue. Only time can tell if a repeal will be healthy and provide stability for America’s financial industry.
Author: Yvonne Kwan
“Dodd-Frank Wall Street Reform And Consumer Protection Act”. Investopedia. N.p., 2017. Web. 19 Feb. 2017.
Geewax, Marilyn. “Trump Team Promises To ‘Dismantle’ Dodd-Frank Bank Regulations”. NPR.org. N.p., 2016. Web. 19 Feb. 2017.