Dodd-Frank Future Uncertain


By Brian Sandler, Markets Media 

President Trump has never been a fan of the Dodd-Frank Act. Quoted in 2016 as saying: “Dodd-Frank has made it impossible for bankers to function,” the Republican has repeatedly declared that he would sign legislation to remove the act.  

The Dodd-Frank Act, which is short for the Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed into law in 2010 by President Barack Obama, with the goal of minimizing a repeat of the catastrophic financial effects of the 2008-09 financial crisis. Regarding the benefits of the Act, Obama said in 2010:  “This reform will help foster innovation, not hamper it.  It is designed to make sure that everybody follows the same set of rules, so that firms compete on price and quality, not on tricks and not on traps.”

What are the tricks and traps that the Act curtailed? For starters, before the introduction of the Dodd-Frank Act, large banks had the tendency to give out fraudulent loans to customers who were unable to pay back the loans in a timely manner, with the banks then using the loans as supposedly low-risk security, only for the lending system to end up causing near-economic collapse. After the Dodd-Frank Act was passed, this type of negligent banking was strictly regulated, preventing banks from making the same mistakes that ended up causing the crisis.

Currently, market observers are uncertain over potential effects any revision to the Dodd-Frank Act could have, with many believing effects will not take hold for several years.

Market participants can reasonably expect Dodd-Frank to be weakened, though not anytime soon, Eaton Vance Vice President Harry Peabody said last week at the 2017 Bloomberg Buy Side Week Client Forum. “This is something that’s going to take a lot of time and it’s not going to be exciting. It’ll probably take seven years for things to begin to impact the banks.”

While President Trump strongly believes the notion that the Dodd-Frank Act is destructive to the economy, recent statements made by him indicate that his intentions regarding how to handle the Act point more to revamping or reform, rather than outright removal.

“We’re doing a major elimination of the horrendous Dodd-Frank regulations, keeping some obviously but getting rid of many,” Trump said in April. “The bankers in the room will be very happy, because we are really doing a major streamlining, and perhaps elimination and replacing it with something else.”

Could this more moderate plan of action have a similar effect on banking as total deregulation would? Considering the history of regulations and their economic results, perhaps a reform is a solution that can be appreciated by all. But as long as another financial crisis such as 2008 is averted, then partial reform is better than none.

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