TRUMP TO ROLL BACK DODD-FRANK RULES
Financials jump on prospect of fewer regulations
Just when Wall Street was starting to wonder whether President Donald Trump really would be good for business, the new administration is delivering on bankers’ wish lists and sending shares of the biggest U.S. financial companies soaring.
Trump on Friday signed two directives aimed at starting the process of rolling back the regulatory system put in place after the financial crisis. Among the targets are rules that protect against predatory lenders, force brokers to lower fees for retirees and ban proprietary trading.
Chief executives including Goldman Sachs Group Inc.’s Lloyd Blankfein and JPMorgan Chase & Co.’s Jamie Dimon have been pushing for changes for years, arguing that the industry has been too constrained by the system put in place by the 2010 Dodd-Frank Act. After Trump focused on limiting trade and immigration during his first two weeks in office — policies opposed by many in the financial industry — the president’s stroke of a pen unleashes a process to undo many of the rules they find most irksome.
“We’re going to attack all aspects of Dodd-Frank,” Gary Cohn, the director of the White House National Economic Council and former Goldman Sachs president, said Friday. The administration “can do quite a bit” without help from lawmakers, Cohn said, “but the more help we get from Congress the better off we’re all going to be.”
Getting Congress to pass changes to Dodd-Frank won’t be easy. Most legislation would require support from at least eight Democrats in the Senate to get around filibuster rules. Republicans could try to go after parts of the law through a process known as budget reconciliation that wouldn’t require a single Democratic vote, but that requires proving specific provisions of Dodd-Frank are a drain on the budget.
House Republicans, led by Financial Services Committee Chairman Jeb Hensarling, plan to roll out a bill to replace Dodd-Frank in coming weeks. The Senate Banking Committee hasn’t proposed its own legislation.
U.S. equity markets, which had dropped earlier in the week amid the immigration controversy, climbed toward recent record highs Friday, with financial stocks leading the way. The 63-company S&P 500 Financials Index advanced 1.8 per cent by afternoon trading in New York. Goldman Sachs surged 4.3 per cent and Morgan Stanley jumped 5.6 per cent, the biggest gain since the day after the U.S. election on Nov. 9.
Cohn and Steven Mnuchin, the former banker Trump nominated for Treasury Secretary, advised the president on the rule changes.
Dimon and other CEOs have complained that the rules tie up resources that could otherwise be used to boost lending and help stimulate the economy.
“Banks have been forced to hoard capital,” which prohibits them from making new loans, Cohn said in the interview.
The restrictions haven’t prevented a jump in new lending. U.S. commercial banks had US$9.19 trillion in loans and leases outstanding at the end of last year, according to data compiled by Bloomberg from Federal Reserve statistics. That’s a US$558 billion increase, or 6.5 per cent, over 2015, the data show. Of that, US$2.1 trillion are business loans, a 7.3 per cent advance from the prior year.
Lending to small businesses and farms fell for several years after the 2008 crisis, but has grown consistently by a quarterly average of 2 per cent since 2013, according to data from the Federal Deposit Insurance Corp.
At JPMorgan, the biggest U.S. bank, loans increased 10 per cent to US$806.2 billion last year, with gains in every category including credit cards and wholesale debt.
On Monday, Trump promised to do “a big number” on Dodd-Frank during a meeting with small-business owners. He said the law had damaged the country’s entrepreneurial spirit and limited access to needed credit, calling it a “disaster.”
The stress-testing mechanism put in place by the act forces banks to prove to regulators they have enough capital to weather intense economic downturns. The process is complex, but it’s made the U.S. banking system “extremely strong, the strongest in the world,” Christopher Wheeler, a bank analyst at Atlantic Equities, said. “The question is, will he tamper with that.”
One focus will be the Volcker Rule limits on banks making speculative bets with their own funds, Cohn said.
Trump is also expected to sign an executive memorandum directing the Department of Labor to review and stall the fiduciary rule — set to take effect in April — that the Obama administration said would protect millions of retirees from being steered into inappropriate investments that generate bigger profits for brokers.
Lincoln National Corp. and Voya Financial Inc. were among annuity providers that rallied on the move.
Banks have been forced to hoard capital, which prohibits them from making new loans.