On dismantling Dodd-Frank

A key Congressman has outlined plans to greatly cut back on the reach of the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

The Dodd-Frank Act was signed into law by President Obama in 2011, in an attempt to reduce the risk that banking activities might lead to a repeat of the 2008 crisis.

However, many have argued that the act went too far. When we attempt to create rules to ensure we do not repeat errors of the past, there is a danger of over-reaction.

The Act has four key elements: consolidation of regulatory agencies, comprehensive regulation of financial markets, new tools for dealing with the financial crisis, and various measures aimed at increasing international standards.

But now, House Financial Services Chairman Jeb Hensarling has produced a memo outlining how he is proposing to scale back regulations on bank lending. The memo suggested that the Consumer Financial Protection Bureau will have its authority to bring cases against financial institutions, under a provision known as unfair, deceptive and abusive practices, removed and databases of consumer complaints will be eliminated. 

Cliff Moyce, Global Head of Financial Services, DataArt said: "The Dodd-Frank Act was intended to reduce levels of systematic risk in the banking sector, such that we would never again see highly leveraged balance sheet positions causing the failure of banks, and those failures causing contagion in other institutions and whole economies. Unfortunately, the Act became an unintended assault on lending to businesses with capital adequacy provisions causing banks to stop lending for commerce. Loans were called in or withheld; overdrafts, materials financing and factoring agreements were not renewed; and, as a result, rates of business failures exploded. In some regions, banks refusing to fund the growth of small and medium sized enterprises has become the biggest single cause of business failure. The Act and much of the other related regulation since the financial crash also caused banks to divert most of their discretionary project budgets towards regulatory compliance initiatives - including meeting the needs of more demanding regulatory reporting. 

"Regardless of your personal and professional view on the value of increased regulatory reporting (is anyone doing anything with the data? What difference has it made?), diverting funding away from projects that could improve products and services to customers should be a concern for everyone. It is in no-one's interests for our banks to become moribund." 

However, Senator Bernie Sanders had a different take, saying: "Trump ran for President saying he would take on Wall Street. Now he's dismantling laws that protect Americans from Wall Street's greed."