GovernanceRegulationDodd-Frank rollback: What we know so far

Dodd-Frank rollback: What we know so far

Passed through Congress as of yesterday and with Trump’s signature looming ever closer to the Dodd-Frank rollback, The Global Treasurer looks to see what the bill endeavored to resolve in the first place and what it would mean for stakeholders if it is revoked.

The Dodd-Frank Act is argued to be one of the most extensive financial regulatory bills since the 1930s. Signed by President Obama in 2009 in response to the financial crisis of 2008.

Following the announcement yesterday that the rollback had passed through Congress 258 to 159, it now means small banks such as American Express and SunTrust would be free from compliance costs due to the threshold increase from $50bn to $250bn in assets that considers them too large to fail.

When the US treasury department proposed the regulations, Steven Mnuchin, treasury secretary, commented: “Properly structuring regulation of the US financial system is critical to achieve the administration’s goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy.”

Frank Holmes, US Global Investors CEO, wrote in Forbes that “the relaxation of Dodd-Frank will be seen as Trump’s crowning fiscal achievement so far, as it has the potential to contribute greatly toward his goal of at least 3% economic growth”.

A study conducted by Regional Bank Coalition shows that since Dodd-Frank was implemented, there has been a reduction of:

  • 3% in loans up to 100k
  • 4% less loans between $100 – $250k
  • 7% less loans between $250k – $1m

Following the rollback, the regulation would see a weakening in the annual stress tests imposed on banks with assets over $50bn, following concerns that the threshold was too low and too restrictive – “a mistake” Barney Frank, the Bill’s author, admitted in 2016.

Another element of the Act is the Volcker Rule which prohibits banks from exposing themselves to high-risk assets whilst larger institutions must ensure compliance.

Alongside the ‘stress test’ reductions, the provisions in the bill plan to step up protections for veterans on predatory loans. Furthermore, an added protection to foreclosures would be provided to duty service members.

But the repeal does not include capital requirements relief that the likes of Wall Street banks like Citigroup and JPMorgan Chase have lobbied for some time. Likewise, the legislation has little benefit for large regional banks such as PNC Financial Services Group or Capital One Financial who keep their SIFI (Systemically Important Financial Institutions) status.

Due to the reduction in trading activities and subsequent loss of revenue, it was suspected that ultimately banks would pass the cost on to consumers by increasing fees.

The impact on banking technology

Akber Datoo, managing partner, D2 legal technology, spoke to Journalist Dave Beach about Dodd-Frank and what this means for banking technology: “The sheer volume of regulation, mainly through the Dodd-Frank, was never going to perfect first time around. Therefore, the amendments are a welcome step back and right-sizing of the regulatory ask.

“The fintech sector has struggled with these recovery and resolution requirements at the core of Dodd-Frank’s attempt to address financial stability. It is the exam that no bank wished to spend on to get an ‘A’ in, but neither could afford to fail,” he said.

Datoo argues that there are benefits that an organization may gain from understanding contractual termination rights and impediments contained in derivative contract portfolios, they are a step to understanding the complexity of the organization.

However not many businesses are willing to harness the possibilities of fintech solutions, he argues.

Datoo suggests that firms should be looking to optimize the business framework. Organizational testing should not be focused on merely passing the exam, but on recovery and resolution.

 

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