US President Donald Trump wants to review the Dodd-Frank Act – but why is this so important for America and the rest of the world?
The Dodd-Frank Act was put in place to supervise US banks following the downturn in 2008.
The law was meant to cap the appetite of banks for risk taking and to protect the economy in the event of another recession.
What does Dodd-Frank do?
The Dodd-Frank Wall Street Reform and Consumer Protection Act offers three protections –
- The Financial Stability Oversight Council – a government body that monitors bank reserves to make sure they have the cash to ride out any instability. The council also supervises banks considered ‘too big to fail’ and has the right to break them up to stabilise the economy.
- The Consumer Financial Protection Bureau – a body that promotes fairness and safeguards consumer rights
- The Volcker Rule – A law that stops a bank trading for gain and stops them from taking part in speculative investment
Why doesn’t Trump like Dodd-Frank?
Trump believes the law restricts the way banks operate by stopping them lending more money to business.
He feels that a review with the aim of relaxing some of the measures would free up cash in the economy and help businesses spend more and create jobs.
Does changing Dodd-Frank mean more financial risk?
That depends on the changes Trump proposes. To strip all the legal safeguards away risks a return to the pre-downturn days of casino banking and the risk of a bank failing and the rest tumbling like dominos because they are so tightly interlinked with each other.
People are more worried about the risk than the fact and Trump has already hinted he will not scrap Dodd-Frank, just change some of the terms and conditions.
So Dodd-Frank only affects the USA?
No. If the US relaxes financial regulation, the risk is some less safe regulators in other countries will take the leash off the banks and inject instability into the global economy. Everything is OK while the economy is performing – it unravels when a downturn is on the horizon.
With such low interest rates around the world, central banks have nowhere left to go to offset another banking crisis.