Posted on Oct 31, 2020 at 11:05 am
Legitimate easing or political deregulation? At the end of Donald Trump’s mandate, the regulations applicable to Wall Street are no longer quite the same as those that prevailed before he entered the White House. The president did not hide it: he had in his sights several measures taken by the Obama administration as part of the Dodd-Frank law on Wall Street reform and consumer protection, passed in 2010 in response to the financial crisis.
Among them, the Volcker rule, which limits the possibilities of speculative activities on own account of banks, and more generally the regulations more strictly framing the activity of banks after the 2008 crisis (stress tests, capitalization levels, etc.) . In January 2017, Donald Trump had also chosen a lawyer specializing in Wall Street and adviser to several banks, Jay Clayton, to head the SEC, the policeman of the financial markets.
The “Volcker rule” relaxed
Almost four years later, several rules have in fact been relaxed. In 2018, Congress voted, with Democratic votes, to reform the Dodd-Frank law, raising the balance sheet size thresholds above which a bank must meet certain prudential standards.
Last year, regulators also lowered capital and liquidity requirements for mid-sized banks, as well as the frequency of stress tests. While excluding the largest institutions from their reform, in the name of their systemic risk. A relaxed version of the “Volcker rule” prohibiting banks from speculating for their own account was also adopted last year. It primarily benefits regional banks, with some adjustments for the largest banks.
“In their best interest”
Last year, the SEC also passed a rule requiring brokers to only recommend financial products to their clients that are “In their best interest”, and that they clearly identify any potential conflict of interest. But the interpretation on the effectiveness of the text is debated within the political class.
If the big banks did not get everything they probably would have liked, they have never made so much profit: 120 billion dollars for the top six American banks last year, also thanks to tax cuts of the Trump administration. And in the third quarter of this year, they proved their resistance to the coronavirus crisis, with a return to profits.
The prospect of a possible change of administration also encouraged them to remain moderate. After having succeeded in dismissing the threat of an Elizabeth Warren who promised vast reforms, Joe Biden displays more measured ambitions, calling above all to protect households in personal bankruptcy or to develop access to financial services and credit.
Even in the report of the “task force” formed by Joe Biden with representatives of the progressive wing, the signatories give little detail of their program: “Maintain and extend the guarantees that separate retail banking from risky investments” and “Strengthen and protect the provisions of the Dodd-Frank Act”.
However, some topics could quickly come to the table. The Supreme Court ruled that the governance of the Consumer Financial Protection Bureau (CFPB), created by the Dodd-Frank Act and criticized by the banks, was unconstitutional.