The Dodd-Frank Act, created in response to the 2008 financial crisis with the aim of reducing risk in the US financial system, is at threat under the newly minted Donald Trump administration.
Some have argued that abolition of the law in its entirety is unlikely, but that certain parts of it are more vulnerable than others. Either way, some form of shake-up in financial markets seems inevitable.
Here's AsianInvestor's take on the matter, after discussion with various market experts, in what is the 10th and final Year of the Rooster prediction. All 10 appear in the latest (February/March) issue of AsianInvestor magazine. Links to the other nine pieces are listed at the bottom of this article.
Will the Trump government dismantle the Dodd-Frank Act?
The 2010 Dodd-Frank Act was one of the defining pieces of legislation of former US president Barack Obama. It represented the most sweeping overhaul of financial sector legislation since the Wall Street Crash of 1929.
Obama's successor, Donald Trump, has described the law as a “negative force” that “makes it impossible for bankers to function”. He has pledged to overhaul it, and to do so he could use the Financial Choice Act, which is yet to be introduced in this congressional session.
One of the Act's key tenets is a proposal to exempt financial institutions with a core tier 1 equity ratio above 10% from aspects of Dodd-Frank. This would include the Volcker rule, which prohibits banks from proprietary trading and restricts investments in hedge funds and private equity.
However, fund managers say such a rollback may have limited outcomes. The main reason is because the financial services industry is globally connected and it has implemented many other pieces of legislation since the global financial crisis.
Mostly notably, this includes the European Union’s Markets in Financial Instruments Directive (Mifid) and Solvency II Directive, plus Basel III regulations governing capital adequacy. Of course, it’s an open question whether Trump’s administration will continue to want US institutions to abide by such rules, given its seeming disdain for the need to abide by the oversight of many global organisations.
On the capital markets side, fund managers think a Dodd-Frank overhaul could lead to an increase in liquidity, but not to anything like pre-global financial crisis days. More important, they say, is the potential for sharp price movements in equity and bond markets because of elevated volatility, thanks to rising interest rates and trade frictions.
However, a partial or full repeal of Dodd-Frank may help smaller regional US banks to increase their lending to smaller businesses and individuals.
Rising rates are also good for banks’ balance sheets generally. As of Friday the S&P 500 Financials Sub-Index had risen 23.8% since November 8, when Trump was elected.
Other predictions for the Year of the Rooster: