Post-crisis banking regulation seems to be under thread given the direction that the Trump presidency is taking on this matter. We have a US Representative asking Yellen to basically sit down and do nothing until the President figures out how he wants the new banking regulation to look like; we have the chair of the Financial Services Committee saying that Dodd-Frank is a disaster for the economy; and the President has asked the Treasury Department to review financial regulation.
What should we expect? There is little certainty (after all, this is Trump’s era) but one of the principles highlighted by the US President is to “prevent tax-funded bailouts”. A somehow optimistic view would suggest that the US might be dropping some of the restrictions imposed in the Act (many coming from the Volcker Rule) and maybe focus more on capital, in line with the Minneapolis Fed approach. This seems to be the FT preferred approach.
A less optimistic view, on the other hand, would suggest a clear walking back of many of the post-crisis regulatory reforms, lifting the restrictions of banks to engage in proprietary trading and investment-banking-type of activities, as well as reducing the amount of capital the largest banks need to hold. A key insight of the crisis is that banks were clearly undercapitalised relative to the riskiness of their balance sheets; walking back on these reforms is a clear sign that the policy cycle has shifted and that the “this time is different” myopia has come way faster than expected.
I finish by leaving Larry Summer’s views on the matter, which are interesting as always.