Trump deregulates banks: here’s what it means for you

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Dn his 2016 campaign, President Donald Trump vowed to overturn the Dodd-Frank Wall Street Reform and Consumer Protection Act, which tightened regulations on banks in the aftermath of the financial crisis. Trump managed to shake that part of his platform in 2018, by enacting a bill that relaxed or removed some key regulations.

However, bank deregulation could set off red flags for many Americans, especially those who remember the collapse in financial markets that prompted the Dodd-Frank Act in the first place. Perhaps more importantly, many Americans may be wondering what banking deregulation means to them and the US economy, a decade after the Great Recession.

The Dodd-Frank Act of 2010 Regulated banks

The Obama administration enacted the Dodd-Frank Act in 2010 to help prevent future collapses in financial markets – and the massive government bailouts that follow. Essentially, the law recognized that many banks are so important to the economy that they must be saved from complete collapse in times of turmoil.

Dodd-Frank identified some banks as Systemically Important Financial Institutions (SIFIs) that must operate by certain rules to protect their assets. These rules prevent banks that accept customer deposits from making risky bets in financial markets, dictate the size of banks’ capital reserves – or how much money they have on hand – and force banks to perform “tests.” resistance “routine that fake a crisis to see if they can stay solvent.

Dodd-Frank was an unpopular law

There is an old adage that a good compromise leaves everyone unhappy. By this standard, the Dodd-Frank Act could have been a masterstroke. The law has been heavily criticized by the banking industry and many conservatives for restricting banks too much and making it more difficult to stimulate economic growth with more loans. At the same time, he has also been the target of the ire of liberals who believe that Dodd-Frank did not go far enough to limit banks against risky behavior.

Part of the problem is that – until there is another major crisis – it’s hard to know for sure whether the rules were too hard on the banks, not enough, or some sort of regulatory golden loop that was just in promote growth but also protect the economy.

Trump deregulates banks in 2018

In May 2018, a rare bipartisan affair resulted in Trump’s enactment of the Economic Growth, Regulatory Relaxation, and Consumer Protection Act. The final banking deregulation bill was a compromise – the previous version was passed by the House of Representatives in 2017, but had to be overturned to gain support from moderate Democrats in the Senate.

The end result was a package of reforms intended to loosen banking laws that did not result in several major changes proposed in the original House bill.

What has changed thanks to Trump?

The big change from the Economic Growth, Regulatory Streamlining, and Consumer Protection Act has allowed small banks to evade many of the Dodd-Frank regulations. The original law applied its strictest standards to any bank with assets of $ 50 billion or more, while the 2018 law raised that standard to $ 100 billion for 18 months and to $ 250 billion for many. banks.

The aim was to allow small and medium-sized banks – which in theory wouldn’t bring down the entire economy if they collapsed – to make more loans and save money. on stress tests. However, many of the important aspects of Dodd-Frank remain firmly in place, especially for large banks with more than $ 250 billion in assets.

1. Small banks don’t need to carry out stress tests

Stress testing aims to ensure that banks are well prepared for unforeseen downturns. This involves carrying out a computer simulation of such an event and analyzing its impact on the balance sheet of each bank. Banks not only had to submit to an annual test conducted by the Federal Reserve, but they also had to perform their own semi-annual internal tests and report the results.

Under the new law, banks with less than $ 250 billion in assets are no longer subject to these regular stress tests.

2. The Volcker rule does not apply to smaller banks

One of the important reforms of the Dodd-Frank Act was the Volcker Rule, named after former Fed Chairman Paul Volcker. Essentially, the rule prohibited banks from trading on their own account.

Investment banks mainly make money by facilitating transactions for their clients, but in the past, banks have also placed their own bets in the financial markets. In 2008, these bets exploded and created the financial crisis. TO prevent another seizure from happening again, the Volcker rule made it illegal for banks to place bets with deposit money.

Trump’s banking deregulation legislation exempts banks with less than $ 10 billion in assets from following the Volcker rule, allowing smaller players to speculate more.

3. Relaxed capital requirements for some banks

Dodd-Frank was instrumental in setting strong capital requirements for banks. These financial institutions are required to withhold a certain amount of cash or bonds to ensure that they have a stable asset cushion in the event of a free fall in the markets.

The capital requirements remain unchanged for the largest banks. However, as banks with $ 50 billion to $ 250 billion in assets are no longer considered SIFIs, small and medium-sized banks have relaxed capital requirements, freeing up money for these banks to lend. . But it could also mean that small and medium-sized banks now face a greater risk of collapse if the worst happens.

What does banking deregulation mean to me?

If you don’t know how banking deregulation affects individual consumers, don’t worry – you are not alone. Many Americans find it difficult to understand these concepts in general, so it is even more difficult to understand how they might apply to you.

While a lot will remain the same about the way you do your banking, it’s still worth understanding how the industry evolves so that you can prepare for the next recession.

1. It depends on where you do your banking

The first thing you need to understand is that your bank might not be affected by deregulation at all. In total, 12 banks are still qualified as SIFI, against 38 previously. If you have accounts with Bank of America, Chase, Citibank, or any of the other mega-banks, almost nothing has changed in the way your bank is regulated – the biggest players are still subject to the same rules.

However, if you are dealing with smaller regional players like Comerica or Zions Bancorporation, your bank no longer has to follow the strict rules that apply to a SIFI.

2. Your deposits are safe no matter

If you are working with a small regional bank, rest assured that your money is not at risk. Even if your bank embarks on a frenzy of risky derivatives speculation that makes the headlines for weeks, your deposits are insured by the Federal Deposit Insurance Corp. up to $ 250,000. No matter how reckless your bank is, the federal government has taken steps to make sure your money is safe.

3. Your bank can save money

Now that your bank is deregulated, it will likely save a lot of money on stress testing and reporting the results to the Fed. Plus, with lower capital reserve requirements, your bank might even increase profits by making more loans. After all, part of the goal of deregulation is to free the banks to do more business.

If that seems generous to you, your bank could share this windfall with you in the form of best interest rates on deposits. Of course, that could just as easily funnel that money into executive bonuses or stock buybacks, so don’t hold your breath.

4. It might be easier for you to get a mortgage

Another area that could potentially benefit consumers is the relaxation of mortgage rules for smaller banks. Dodd-Frank included rules on the types of mortgages banks could offer, requiring them to stick to relatively safe “qualified mortgages”. The 2018 law freed banks with $ 10 billion or less in assets from these requirements.

This means that smaller regional banks and credit unions might be able to offer more mortgages, which would make it easier for consumers to get financing to buy their homes.

4. Freeze your credit for free

One of the changes Trump made to banking deregulation is that you can now freeze your credit for free. Probably a reaction to the 2017 Equifax hack, this part of the new law makes it easier to freeze your credit if you are concerned about your personal information being stolen. However, some have argued that the free credit freezes are in fact a step backwards as they could anticipate stricter state laws.

Is overall security in decline in the banking industry?

While allowing small and medium-sized banks to get out of regulation can help stimulate the economy, it could also set the entire banking system up for another disaster. Like most big questions about the economy, there is a lot of uncertainty involved.

However, in the short term, the most important thing to remember is that the money in your bank accounts is protected by the FDIC. Banking deregulation has big implications for the country and the economy, but that doesn’t mean you have to worry about your savings account.

By Joel Anderson for GOBankingRates.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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