During their latest debate, Republican contenders for the American presidency have attacked the Dodd-Frank regulations and proposed scrapping the law if they take over after Obama’s final term ends.
Enacted in 2010, Dodd-Frank, or “The Wall Street Reform and Consumer Protection Act” as it is officially called, was a direct response to the financial crisis of 2008 and to the perception that corrupt big banks and unscrupulous hedge funds were to blame. Many firms, brokers and professionals that have had to comply with the numerous requirements of the law complained that it was an overreaction that simply complicated Compliance and increased costs.
This was especially taxing on smaller operations that do not have the vast legal and lobbying resources that the big players do. The Republicans echoed this sentiment saying that Dodd-Frank hurt local financial institutions, community banks and small businesses, however their opponents on the left shot back after the debate by saying they are really just looking to unshackle Wall Street from any regulations.
Florida Senator Marco Rubio said: "The big banks, they have an army of lawyers. They can deal with all these things. The small banks, they can't deal with all these regulations. This is an outrage. We need to repeal Dodd-Frank." "It's suffocating small business," New Jersey Governor Chris Christie added.
Former Florida Governor Jeb Bush explained: "What we ought to do is raise the capital requirements so banks aren't too big to fail. Dodd-Frank has actually done the opposite, totally the opposite." Texas Senator Ted Cruz added: "The truth is, the rich do great with big government. They get in bed with big government. The big banks get bigger and bigger and bigger under Dodd-Frank, and community banks are going out of business."
Finally, taking the hardest line against the regulations was former HP CEO Carly Fiorina, who said: "We've created something called the Consumer Financial Protection Bureau, a vast bureaucracy with no congressional oversight that's digging through hundreds of millions of your credit records to detect fraud. This is how socialism starts, ladies and gentlemen!"
Market Response
To see if real change is actually possible, we turned to GFT’s Alan Morley for comment on the subject. As GFT works with 90% of the world’s largest banks and hedge funds and often advises on how to navigate Dodd-Frank, Morley keeps a close eye on the matter. “Will it be repealed by an incoming President? Unlikely. Will revisions happen? Inevitably, but it’s unclear at this time what will change, and to what extent. Here’s where I believe Dodd-Frank is exceling, and where there’s room for improvement.
Alan Morley, Regulatory Compliance & Surveillance Practice Lead, GFT
The key areas related to mortgage issuance, consumer finance and investor protection have great merit. But as many pundits like to address, improvements to understanding and addressing systemic risk have come at significant financial cost. Yet this has come with a silver lining, and has enabled banks to identify new opportunities. Many banks have since restructured and fortified their balance sheets and are in a stronger position to face the Volatility of the global market in a way that was not possible before Dodd Frank.”
However, Morley adds that “...aspects related to bank operating capital and the Volcker Rule will most likely be adjusted. Simply, there needs to be a better balance in the system with how regulators are punishing and controlling the banks, and how banks run, as financial institutions need to take on an acceptable amount of risk. Banks that operate as commercial entities in a competitive market run the risk of failing, but likewise, combating and adjusting for this risk is what helps banks thrive. A certain amount of risk is necessary in any competitive marketplace.
The bottom line is, banks need to be profitable, not as a result of reckless risk taking and greed, but as better managed and transparent institutions. Better clarification is needed for Proprietary Trading and many of the anticipated new rules to come. Any new President should offer strong guidance, not simple and blanket removal of such bold and reaching legislation.”
