The Dodd-Frank Act as we know it appeared to receive another nail in its coffin last week, as the House of Representatives passed legislation that would reverse several core financial regulations put in place in 2010 following the global financial crisis, according to the New York Times. While the consensus, even amongst Wall Street lobbyists and lawyers, is that the new legislation will have trouble getting through the Senate in its current form, Thursday’s vote brought a glimmer of hope to the financial sector.
Boost for Banks
The KBW Nasdaq Bank Index (BKX), which has been flat for most of the year, jumped on Thursday and Friday on the news and then moved little on Monday. If the new bill, under the name of the Financial Choice Act, makes it through the Senate then big U.S. banks, including JPMorgan Chase & Co (JPM), Goldman Sachs Group Inc. (GS), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Citigroup Inc. (C) and Morgan Stanley (MS), could expect to see a boost in profits and stock prices, which have lagged the broader market this year. (For more, see also: How New Bank Rules Will Buoy Bank Stocks.)
The Trump administration unveiled a sweeping plan late Monday night. The report, about 150 pages long, recommends changes like "easing up on restrictions big banks now face in their trading operations, lightening the annual stress tests they must undergo, and reducing the powers of the Consumer Financial Protection Bureau (CFPB)," reports Reuters.
Current regulations under Dodd-Frank have restrained bank lending and consequently muted bank profits. Of course, this was supposed to be the price that had to be paid in order to limit the risks within the financial system. Less than a decade after the financial crisis, the Republican-sponsored Financial Choice Act is evidence that some believe that price is too high and is not only inhibiting bank profits but growth in the rest of the economy.
Proposed House changes in the new legislation that would make it easier for banks to engage in increasingly risky lending activities include the removal of the Financial Stability Oversight Council’s ability to determine the systemic importance of certain large non-banking financial institutions and their need to be under greater regulatory supervision.
Another proposed change would be to exempt banks that maintained a minimum leverage ratio of 10% from adhering to certain regulatory requirements. While the biggest banks have claimed that it would be too costly to maintain such a ratio and therefore would not benefit from the change, the new rule would lighten the regulatory burden on many smaller lenders, according to the New York Times.
The new bill would also get rid of the Volcker Rule, which prohibits banks from short-term proprietary trading and limits their ownership and relationship with hedge funds and private equity funds. The Consumer Financial Protection Bureau would be renamed the Consumer Law Enforcement Agency while at the same time removing the bureau’s supervisory and examination authority and its ability to monitor “unfair, deceptive, or abusive acts and practices.” (For more, see also: Dodd-Frank: Republicans’ New Plan to Replace It.)
Despite banking lobbyists’ acknowledgement that at least the repeal of the Volcker Rule and removal of the Consumer Financial Protection Board would not make it past the Senate, some of the other changes would definitely soften the regulatory environment faced by many of the nation’s banks. While that would give banks and possibly the economy a boost, it comes with the added cost of a more risky financial system.