18 December 2017
Paul Harrington

Paul Harrington

Paul Harrington - GFT

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Will the Trump administration have a repealing effect for all?

30 January 2017  |  2930 views  |  0

Donald Trump's surprise election win looks like good news for Wall Street, with bank stocks such as Bank of America, Citigroup, Goldman Sachs, JPMorgan, Morgan Stanley, and Wells Fargo all ending in the green in the days following Trump’s victory, increasing overall in value by 4%.

Ignoring the possible impacts of inflationary increases or even volatility due to isolationism that the Trump regime may create, there is a clear opportunity for trading desks. One major reason for the jump appears to be the expectation that Trump will reduce regulation which has been indicated as hampering bank profitability. On the regulatory front, the market appears to be pricing in the fact that Trump's administration will introduce laxer rules.

Trump's transition team has made it clear the new administration wants Congress to dismantle the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Barack Obama in 2010. Dodd-Frank, drafted in response to the 2008 financial crisis, called for, among other things, establishing the Consumer Financial Protection Bureau (CFPB), a government agency responsible for protecting consumers from unfair, deceptive and fraudulent business practices. In summary, Dodd-Frank rules require big banks to hold on to more capital, undergo more intense regulatory scrutiny and limit their ability to return capital to shareholders in the form of dividends and stock buybacks.

However, there are analysts who do not believe that the Dodd-Frank Act will ultimately be repealed, nor that the CFPB will be dismantled. If it were to happen, some feel it would be "unlikely to have a material impact for banks in the aggregate," noting that there has been little talk of repealing the Volcker Rule, specifically. Although the Republicans now control the House and Senate, the Democrats hold enough seats in the upper chamber to block attempts to kill Dodd-Frank which they originally supported.

Some fraud prevention experts and former regulators believe that dismantling Dodd-Frank would significantly reduce the powers of the CFB – the agency that in September 2016 led the charge to fine the USA’s third-largest bank, Wells Fargo.

Meanwhile some banks and credit unions have questioned the CFPB’s role within the Federal Financial Institutions Examination Council (FFIEC). While the other FFIEC agencies oversee specific banks or credit unions, the CFPB is a watchdog over all institutions and other financial businesses, and acts more as an independent agency.

Defunding the CFPB could affect how much banks scrutinise their internal practices for new account opening, which was the issue which got Wells Fargo into trouble. Credit unions as well as small and mid-size banks have complained that stricter regulations have raised compliance costs, in many cases pushing institutions to merge. The CFPB’s latest rules covering various consumer loan agreements will do little to impress these institutions. Even if they are quickly finalized, those rules along with other bureau regulations that have taken effect could be rewritten under a new leader.

On 10 December 2013, the Volcker Rule was approved by representatives of the five agencies who needed to implement it. These include the Securities and Exchange Commission (SEC), the Federal Reserve, the Commodities Futures Trading Commission (CFTC), the Federal Deposit and Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency, a division of the Treasury Department.

The SEC and the CFTC said the Volker Rule didn't go far enough in limiting banks' risk-taking. As a result, Treasury Secretary Jack Lew announced it will require bank CEOs to guarantee personally that their companies are in compliance. That means they are legally liable for failure to comply. That will probably mean everyone in a bank's chain of command will have to attest personally, as well.  

The Volcker Rule was designed to prevent large banks from becoming ‘too big to fail’. The rule was implemented to undo some of the damage caused when Congress repealed in 1999 the Glass-Steagall Act which separated investment banking from commercial banking.

Through the repeal of the Glass-Steagall Act, the large banks gained an unfair competitive advantage over smaller community banks and credit unions. As they became bigger through acquisitions they became too big to fail. The Volker Rule has meant banks have still profited but they have been prevented from making risker speculative investments by using customer deposits.

It seems clear the new US President will support some deregulation of financial institutions, he has not as yet talked about CFPB, payday lending rules or other specific issues, which would potentially be the easiest starting point to relax some rules. Such changes to these areas would mean a more lax regulatory environment for money managers, insurance companies, consumer lenders and other financial firms, though it is suggested an outright repeal of Dodd-Frank is unlikely.

Although interested in loosening financial regulations, even investor and Trump supporter Carl Icanh said during a CNBC interview that he would “not support repealing Dodd-Frank”. Furthermore, an influential investment banking executive said that he expects Trump to focus on other priorities. “This big infrastructure plan and probably tax relief - those are the two big pillars of his domestic policy. He is not going to want to get bogged down in trench warfare over Dodd-Frank.”

This all potentially signals a disharmony between the national regulators, with the UK and Germany heading towards a Glass-Steagall approach towards banking that will lead to banking business separation, whilst the possible US direction is the opposite. Accompanying all this is the impact to individual institutions who will need to remodel their systemic and operational architecture, neither of which is cheap, or small in its undertaking.

In summary, to date, there have currently only been words that have been positive to banking stocks, but time will determine whether pre-electoral rhetoric solidifies into tangible actions and changes. If they do, it is likely that banks will profit greatly through the relaxation of controls and accountability, but in the case of any future financial meltdown, the taxpayer will once again be forced to shoulder the burden of risk and recovery. 

 

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