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Dodd-Frank reform: glee on Wall St – but fears for consumer protection

Bloomberg called it “more pageantry than policy” when Donald Trump signed a directive on Friday to begin a review (and probable scaling back) of the Dodd-Frank Act.

When it comes down to the practical processes of passing or repealing financial legislation, President Trump is about to find out that change won't be easy or quick. Following the financial crisis of 2008, it took years to implement Dodd-Frank – The Dodd-Frank Wall Street Reform and Consumer Protection Act, to give it its full name. Repealing or cutting back the legislation is therefore likely to be a lengthy process if standard legal procedures are adhered to. For now, Trump has ordered regulators to produce a study on financial rules within 120 days: the Treasury secretary must consult members of different regulatory agencies and the Financial Stability Oversight Council, then report back. Trump also promised that he will be “doing a big one on Dodd-Frank”, calling the reforms “a disaster”.

What will Trump change?

Quite what “doing a big one” actually means isn't yet clear but according to an article in Bloomberg, it's likely that Trump will aim to prune the following aspects of the legislation:

  • a requirement for risky financial companies to be subject to tough Federal Reserve oversight;
  • rules for dismantling failed banks;
  • the Volcker Rule, which prohibits banks from making market bets with their own capital (proprietary trading);
  • the remit and operation of the Consumer Financial Protection Bureau, an agency that seeks to make sure financial institutions and companies treat US consumers fairly.

Trump will face challenges

Trump is likely to put Gary Cohn, director of the National Economic Council, and Steve Mnuchin, who is nominee for Treasury Secretary, in charge of his review of Dodd-Frank. However, it's likely that there will be challenges to overcome if he's going to fulfil his promise of dismantling Dodd-Frank:

  • the Trump administration doesn’t have any of its appointees running the agencies that oversee financial rules – including the SEC, the Federal Deposit Insurance Corp., the Commodity Futures Trading Commission and the Office of the Comptroller of the Currency.
  • congress will have to pass new legislation for many Dodd-Frank regulations to be eased;
  • the president’s decision to put two former Goldman Sachs partners in charge of the effort has increased opposition from Democrats.

Criticism of Dodd-Frank

The Dodd-Frank Act isn't perfect and has come under fire for stunting the growth of small businesses by restricting bank credit to them. The reform also promised to get rid of the 'too big to fail' banks but some of Wall St's biggest institutions are bigger now than they were before the 2008 crisis.

Trump unlikely to protect consumers

Many aspects of the stated intentions to undo the Dodd-Frank Act reforms are deeply troubling. Elements such as the Volker Rule and oversight requirements for risky entities are there to strengthen the financial system and prevent another 2008-style credit crunch. And it really bares repeating that the full name of the reform – The Dodd-Frank Wall Street Reform and Consumer Protection Act – is a clue to one of the key purposes of the legislation: consumer protection. It therefore seems likely that significant rollbacks of the Act will expose US consumers to more financial risk. If there was any doubt that protecting consumers is not high on Trump's agenda, last week he also signed a presidential memorandum instructing the Labor Department to delay bringing in an Obama-era rule requiring financial professionals to put their clients' interests first when giving advice on retirement investments.

Good news for Wall St

Both Mnuchin and Cohn are former Goldman Sachs executives and Trump said on Friday that Jamie Dimon, CEO of JPMorgan, is also advising him on the reform of Dodd-Frank. The news that Trump had ordered a review of the legislation was greeted on Friday by a rise in bank shares, including those of Goldman Sachs and JPMorgan, which rose by 4 per cent and 3 per cent respectively.  

This item appears in the following sections:
Financing Short-Medium Term Deficits
Control & Compliance in Operations

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