The 2008-09 global financial crisis tsunami, triggered by excessive banking risk taking in derivative and leveraged financial services which bankrupted not only banks but countries, brought about wide ranging regulations to ensure that systemic bank risk is contained.
In the US, in order to avoid another financial meltdown, the Dodd–Frank regulations was passed by Congress which severely restricted banks’ ability to engage in proprietary trading on their own account and also restricted hedge fund like activities at banks that receive deposit guarantees from the US government. US banks are now gleefully expecting a “reform”, if not outright rollback in bank regulations, spearheaded by the assorted millionaires and billionaires on “team Trump”.
Billionaire venture capitalist Carl Icahn has been appointed as special advisor of regulatory issues and Steven Mnuchin, US Treasury Secretary, a hedge fund millionaire and Goldman Sachs alumni who has publicly stated that he wants to strip back parts of the Dodd-Frank Act. This has significant repercussions, both to the US financial sector as well as internationally, including the Gulf economies, as the recent global financial crisis so vividly illustrated.
President Trump has now signed an executive order to review the 2010 Dodd –Frank financial regulations and stated that “Dodd–Frank is a disaster … and we’re going to be doing a big number on Dodd-Frank”.
Those critical of the Act have argued that it is an example of government being overtly–controlling and it fits into the President’s election promise to drain the Washington swamp, as he and his advisors believe that unwinding some of Dodd-Frank regulations will enable smaller community banks to compete by offering choice to consumers.
Financial regulators in Europe most affected by the 2008-9 fallout have supported coordinated international regulation and macro-prudential supervision of the world’s largest banks, some of whom had branches operating in the Gulf countriesDr. Mohamed Ramady
One of these regulations under threat of repeal is the so-called fiduciary rules in consumer banking which aimed at blocking financial advisors from steering clients towards investments with higher commissions and fees, making them less valuable on maturity. Trump team now argues that the Act limits investment choices by forcing asset managers to opt to low yield and low risk investment options.
Can President Trump really do a “big number” on Dodd-Frank? It would seem that, notwithstanding a rally in US bank shares following the Trump executive order, the move is largely symbolic as only the US Congress can rewrite the legislation which cannot be undone by a fiat executive order, and Treasury Secretary Mnuchin has 120 days to consult with the Financial Stability Oversight Council , also established by the Dodd-Frank Act.
The treasury secretary has to make a persuasive case and prove that the Act does not foster economic growth, hinders US companies to be competitive with foreign firms in domestic and foreign markets, and has not advanced US interests in international financial regulatory agreements.
It is not certain that President Trump will obtain all the necessary Republican Congressional and Senate support as the Dodd-Frank Act was a sweeping bi-partisan plan. There are some Republican representatives who will be under pressure from consumer and activist groups, like Occupy Wall Street, who will remind their representatives of the consequences to ordinary families whose homes were repossessed during the 2008-9 financial crisis.
The set in motion a wave of corporate crisis that led to a global recession, that also affected many countries of the Gulf. Moderate Senate Republicans will most probably resist wholesale rollback, and given the fact that President Trump could not muster all his party’s support to repeal Obamacare, this is a possibility.
Instead, President Trump will initiate executive order – driven (non-legislative) piecemeal changes, followed by legislative fixes such as his proposed tax cuts. The drive to wipe out or scale back Dodd-Frank has seemingly lost some momentum.
Trump issued an executive order on Feb. 3 for Treasury Secretary Steven Mnuchin to review the law, but the president made no mention of it in his priority-setting speech to Congress on Feb. 28. As with the Republican vow to repeal Obamacare, the sticking point may be finding a replacement for the law on the books.
Whether Dodd-Frank is partially or totally repealed will have international consequences, given that today’s global financial system is closely interlinked and no country can set up its crisis proof firewall.
Financial regulators in Europe most affected by the 2008-9 fallout, like Germany, the UK, Spain, Greece, Italy and Portugal have supported coordinated international regulation and macro-prudential supervision of the world’s largest banks, some of whom had branches operating in the Gulf countries.
The aim was to monitor more closely these international institutions that are “too big to fail” and limit the type of risks they can take. However, building another wall to protect American banks from global banking rules is not something that will come easy.
It has taken nearly seven years for a semblance of confidence to return to the international financial system, but as the current resurgence of Greek debt negotiations illustrate with bailout negotiations between Athens and its creditors stalling, the possibility of “Grexit”, or euro exit, has re-emerged. With selective policy amnesia setting in, the danger of yet another financial crisis remains real.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia.