Trump moves to deregulate Wall Street – what does it mean for investment and trading?
President Donald Trump has taken his first steps towards scaling back financial service regulations in the United States, but what does this mean for investment and trading?
Trump Reviews Regulation
Last Friday, Trump ordered a review of two key measures designed to protect consumers and the USA’s financial system. Both measures are deeply unpopular on Wall Street, described as examples of excessive government regulation hindering the economy by forcing banks into conservative strategy.
Introduced by the Obama administration in 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was a direct response to the 2008-09 global financial crisis. It is widely thought of as the most comprehensive set of financial regulatory reform measures for preventing financial institutions embarking on risky investment and trading strategy since the 1930s.
A key component of the act is the Volcker Rule. It places limits on the investments banks can make as well as restricting speculative trading. It also prevents banks from engaging in proprietary trading, that is, trading for the bank’s direct profit rather than for a client’s. Put simply, the rule makes a clear split between a bank’s commercial and investment businesses.
Dodd-Frank
During his presidential campaign, President Trump suggested that removing, or at least dramatically reforming, the Dodd-Frank Act would encourage the economy and create jobs by making it easier for banks to give loans to businesses.
Last week, Trump vowed that cuts in US financial regulation were coming, stating: “We expect to be cutting up a lot of Dodd-Frank.”
After a meeting with Jamie Dimon of JPMorgan Chase & Co., Trump signed an executive order directing the Treasury secretary to consult with regulators about what needs to be done to repair the Dodd-Frank Act. The report is expected in four months.
Although many financial experts and economists agree that reforming the Dodd-Frank Act is a good idea, they are also quick to stress that the Act has achieved its aim of stopping big banks from making risky investments.
Reducing the restrictive regulations of the Act could boost the economy, in turn encouraging investment. The danger, however, is that excessive deregulation could signal a return of the reckless trading that caused the last financial crisis.
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