Coming Soon: Repeal of Dodd-Frank?

Blog posted On November 15, 2016

Why did we implement Dodd-Frank? 

In 2010, the Dodd-Frank law gave regulators the administrative power and tools they needed to shut banks without resorting to bailouts.  Because of Dodd-Frank, regulators were able to restrict risky lending and also protect consumers from deceptive marketing of financial products. 

Today, six years after the legislation passed, economists have an answer to the dogging questions “Are banks safer after Dodd-Frank?”  That answer is, “No.”

Valuation metrics presented by Harvard economists, including President Obama’s former National Economic Council director Larry Summers, assert that banks are not safer post-Dodd-Frank.  Their research found, “no evidence that markets regard banks as safer today than they were before the crisis, despite large decreases in leverage.”

What’s next for Dodd-Frank? 

In September, the New York Times reported, “a House committee […] approved a bill to roll back significant portions of the financial-crisis-era overhaul known as the Dodd-Frank Act.”  The legislation, known as the Financial Choice Act, will not be adopted right away, and may not even go into effect this year.  The future of the Financial Choice Act faces division along party lines with Republicans mostly supporting it and Democrats mostly opposing it. 

Though uncertain, the recent change in leadership makes a reform of Dodd-Frank a possibility.  On his website, President-elect Donald Trump calls for its dismantling and with a Republican control of congress new policy may start to take shape.   

Why does it matter?

While the majority of reports detailing the results of Dodd-Frank refer to tepid economic growth and general under-delivery, the legislation did improve the debt-equity balance by pushing banks to raise more capital. 

As it stands, the overwhelming opinion is that Dodd-Frank did not achieve its objective of “fixing” the financial system.  The economy continues to chug along at a 2% growth rate, well under the 3% norm.  Bloomberg identifies the core problem as “the franchise value of banks fell after the crisis, which pushed banks closer to insolvency.  As recovery proceeded, however Dodd-Frank pushed down the value of banks once again.”

While there will not be an immediate repeal of Dodd-Frank, change in leadership and new legislation moving through Congress suggest that reform is on the horizon.

Sources: Seeking Alpha, New York Times, National Law Review, Bloomberg, Investors.com, GreatAgain.gov