Plethora of regulations were imposed on US and global banking system in 2010, post financial crises primarily with a desire to promote market discipline and protect consumer interests. Almost about six years after, a pertinent question that everyone is asking is this - "Is our financial system stronger and safer today, than it was in 2007-2008?" That question is generally debated based on contrary beliefs and perception held by many, however, the realities actually emerge only when the outcomes prove them otherwise. Sticking to the perception and belief of market, banking experts and general public, the opinion is greatly divided in terms of effectiveness of these regulations and specifically the Dodd-Frank Act. How effective has Dodd-Frank Act been in the past six years at the cost of billions of dollars spent on its implementation?
Interestingly enough, republicans winning the 2016 general election has provided the much needed fuel to the fire to aggressively debate this point to possibly get rid of some of these regulatory burden - which have otherwise proven to be counterproductive (as perceived by many who oppose certain implemented rules under the Act) by negatively impacting the economic growth, making credit inaccessible & expensive in general and increase the cost of financial services for end-customers.
Taking a hard look at the much debated Dodd-Frank Act is on top of the agenda for incoming establishment and was also one of the big promises made by president-elect during his campaign. And it seems almost certain now with the appointment of Mr. Steven Mnuchin - a well-known Wall Street insider and a strong lobbyist - as Treasury Secretary designee for dismantling significant provisions of Dodd-Frank.
So what does it mean?
A few expect the incoming establishment to completely scrap the legislation as promised by president-elect during his campaign. We think it will be difficult to completely do away with the regulation because there are significant resources invested to enable regulatory oversight and consumer protection which were necessary - given the turmoil US economy went through after 2008. Repealing all of the rules doesn't seem to be a practical rather a risky proposition (on top of costs already incurred to implement it!) which can negatively impact consumer/investor confidence and the overall US economy.
Therefore, a prudent approach for the in-coming establishment would be to look at what is working and what is not to further strengthen the rules of the game. It could mean easing certain aspects of implemented rules which have otherwise been counterproductive (in hindsight!) in facilitating a level-playing field, helping to reduce the burden of cost of compliance for participants (including opportunity-cost & opportunity-lost, both) and/or re-look at the regulatory impediments to improve credit-accessibility and bring down the cost of banking services for end-customers ultimately. Having said that, the origin of most of the proposed changes has direct linkage to the newly proposed Financial Choice Act, introduced earlier this year by Mr. Jeb Hensarling which will be debated and we think, would pave the path of future financial regulatory reforms and amendments to the rules implemented under the Dodd-Frank Act, specifically.
As we understand and read the situation, the positive connotation to the proposed Financial Choice Act is that, in essence it is not about completely repealing the rules implemented under Dodd-Frank Act, but largely aiming to modify more complex rules which have been observed or debated to be otherwise detrimental for the economic growth and to ultimately enable more choice & independence to financial institutions while protecting consumer interests.
In my next blog, I will write about the important changes that are expected to be actively debated for early implementations.
