Financial regulation in the US: an uncertain future?

Written by Jake Plenderleith on Monday December 5, 2016

‘This is going to be a president who will be the biggest regulatory reformer since Ronald Reagan. There are just so many regulations that could be eased.’

Stephen Moore, Donald Trump’s economic advisor

The President-elect of the United States is a man on more familiar ground on Wall Street than in Washington DC, and yet Donald Trump will surely be focusing his attention on the banks when he moves into the White House in January.

Reviving the sluggish US economy – and creating blue collar jobs – has been the staple of Trump’s successful campaign and part of his plan for reinvigorating the US economy is by removing regulatory restrictions placed on banks. 

What then is the fate of existing financial legislation under the incoming President?

Dodd-Frank Wall Street Reform Act

Dodd-Frank looks vulnerable in the wake of Trump’s election, with the incoming President’s transition team vowing to dismantle the Act. Trump has expressed his dislike for the Act, passed in 2010 by the Obama administration to enhance regulation of the banks, describing it as a ‘very negative force’.

The Act was passed in order to reduce risky lending from banks, promote financial stability, protect consumers and avoid any potential taxpayer bailout of banks that are ‘too big to fail’.

Despite the intentions of the incoming administration, most analysts don’t believe the legislation will be fully repealed. Should he choose to try and do so, Trump would face stiff opposition from Democrats in the Senate and even from within his own party.

Republican control of the House of Representatives and the Senate doesn’t mean unanimous backing for Trump’s economic policies. When it comes to financial regulation, Democrats and Republicans cross party lines.

For example, Bernie Sanders voted for legislation put forward by Republican Rand Paul to audit the Federal Reserve back in January.

Nevertheless, Trump will almost certainly look to dilute existing financial regulation and there is a strong appetite in the majority of the Republican Party to dismantle Dodd-Frank.

One suggestion floated by Trump has been the call for a reintroduction of the Glass-Steagall Act, a bill introduced in 1933 aimed at preventing the failure of banks after almost 5,000 banks collapsed following the Great Depression. In 1999 much of the law was repealed, a decision which some argue contributed to the 2007-08 financial crisis.

CFPB’s future in the balance

The Customer Financial Protection Bureau (CFPB) was one of the larger initiatives that Dodd-Frank ushered in and is potentially in a very fragile position. 

Republicans have repeatedly slammed the CFPB for placing too many constraints on banks. It has come under intense criticism from potential members of Trump’s new administration. Jeb Hensarling, one of the CFPB’s most outspoken critics – is in the running for Treasury Secretary.

The CFPB has been controversial since its foundation due to it being perceived in some quarters as being an overly-bureaucratic extension of government power. Nevertheless but has had some successes. Its most famous case was the recent $185 million fine delivered to Wells Fargo, after it was discovered staff transferred money from real customers into 2 million fake accounts, and charged them overdraft and insufficient funds fees. 5,300 members of staff were subsequently fired.

Democratic senator Elizabeth Warren, who was influential in establishing the CFPB, has warned against removing powers from the organisation.  

‘Americans want to hold the big banks accountable,’ she said. ‘That will not happen if we gut Dodd-Frank and fire the cops responsible for watching over those banks, like the Consumer Financial Protection Bureau.’

If the CFPB is to close, it seems that it won’t go without a fight.

Conclusion

Regulation is not disappearing anytime soon but it will almost certainly be reshaped to chime with Trump’s political vision. The issue is perhaps unusually complicated due to Trump’s sudden arrival into US politics and the uncertainty that surrounds the detail in some of his policymaking.

Though Trump’s rhetoric may indicate the removal of regulation, there may be some surprises in store; Trump shares an ideological ambition to create the modern equivalent of Glass-Steagall with ardent critic Warren. Such surprising alliances mean there is much uncertainty regarding the fate of Dodd-Frank and the CFPB. 

Only time will tell whether they are still with us when the next US election rolls around in four years’ time.

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