Upcoming changes on the legislation are inevitable; but what impact will these changes have in a shifting political landscape?
Where Dodd-Frank is excelling and where there is room for improvement:
Will Dodd-Frank be repealed by an incoming President? As we watch the presidential debates unfold, conversation had been had regarding repealing the legislation. While that is still in question, we will inevitably see changes to Dodd-Frank in the future.
Throughout the campaign, many presidential candidates have regularly taken aim at the highly regulated environment that President Obama has set forth. This brings to light a number of key areas to consider.
Systemic risk in question
Key areas of the regulation, in particular those related to mortgage issuance, consumer finance and investor protection have merit. But as many pundits like to address, improvements to understanding and addressing systemic risk have come at significant financial cost. However, this has enabled banks to identify new opportunities.
Many banks have restructured and strengthened their balance sheets and are in a more resilient position to face the volatility of the global market in a way that was not possible before Dodd-Frank. With this in mind, aspects related to bank operating capital and the Volcker Rule will most likely be adjusted. Put in place to prohibit banks from making speculative investment decisions that spurred the 2008 financial crisis, the Volcker Rule is a regulation that prohibits banks from conducting certain investment activities with their own accounts. The rule also regulates bank’s relationships and ownership with private equity and hedge funds. Presidential candidates such as Hillary Clinton plan to strengthen the rule by proposing a tax aimed a penalizing harmful high-frequency trading strategies.
Shifting impact on banks and proprietary trading
There needs to be a better balance in the system with how regulators are punishing and controlling the banks. The way banks run needs to be altered as well, as financial institutions need to take on an acceptable amount of risk.
Banks that operate as commercial entities in a competitive market run the risk of failing. On another note, combating and adjusting for this risk is what helps banks thrive. A healthy amount of risk is necessary in any competitive marketplace. Banks need to be profitable – not as a result of reckless risk taking and greed, but as better managed and transparent institutions. Better clarification is needed for Proprietary Trading and many of the anticipated new legislation to come. Any new leader should offer strong guidance, not blanket removal of such bold and wide reaching legislation.
This argument will be sure to evolve, especially as the presidential debates heat up. As more pundits take into consideration the ramifications of repealing such legislation, it will be interesting to watch the conversation unfold.
This content was recently published in TabbForum.