PMC Weekly Review - November 18, 2016
Although much hot air is being blown about in the wake of the Presidential elections, possible reform of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) has received sweeping attention. Its reform is an arrow aimed mainly at the financial services industry, and changes to it could have wide-ranging influence on our economy. Donald Trump’s statement this past Friday that he would dismantle the Dodd-Frank legislation was met with both praise from banks, who want less regulation, and with condemnation from legislators, who see the legislation as being vital in helping prevent another financial meltdown.
Dodd-Frank, made effective in July 2010, was a 2,300-page piece of legislation created in the wake of the 2008 financial crisis, whose intent was to avoid another catastrophe. Named after a U.S. Representative (Chris Dodd) and U.S. Senator (Barney Frank), both of whom were heavily involved in drafting the bill and sponsored the legislation, Dodd-Frank comprises a whole host of rules governing changes to the financial services industry that had not been seen for decades.
As one would imagine from a 2,300-page bill, it contained several provisions and rules enacted over the following seven years to regulate financial companies. Its key component: creating the Consumer Financial Protection Bureau (CFPB), a regulatory agency tasked with overseeing financial products and services. The CFPB’s most notable action to date was the $100 million fine levied on Wells Fargo Bank in September for secretly opening unauthorized deposit and credit card accounts—illegal practices that culminated in Congressional hearings and led to the ultimate resignation of the company’s CEO.
Another major element of the bill was the Volcker Rule (named after former Federal Reserve Chairman Paul Volcker). Approved in December 2013, the rule either limits or precludes financial institutions from participating in both depository and investment activities, thereby reducing the amount of speculative investments held on a bank’s balance sheet. Furthermore, this rule also restricts a bank’s investment in hedge funds and private equity funds to no more than 3% of Tier 1 capital—defined as the measure of a company’s common stock and retained earnings. Some argue that having this provision in place at the time might have prevented the “London Whale” trading debacle that cost JPMorgan $6 billion in 2012.
These two provisions of Dodd-Frank are in the direct crosshairs of Donald Trump, his transition team, and many Republicans. Their argument for repealing either the whole bill or portions thereof revolves around the notion that smaller community banks have languished under the weight of increased regulation, making it entirely impossible for them to compete with larger banks and financial institutions. Proponents of the bill argue that its regulations are needed to rein in large banks and financial institutions and hold them accountable, and view the bill in its current state as a preventative measure that bars the risky mortgage lending that triggered the financial crisis.
Right now, however, all of this talk might just be bluster. No one can be sure what will happen, nor how much of the President-elect’s agenda will be implemented. But just as big banks and Wall Street figured heavily in both candidates’ campaign speeches, they will be susceptible to the uncertainties that lie ahead.
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