Recently, the President Donald Trump has ordered financial regulations overhaul to change the laws governing the banks. These laws were introduced after the global financial crisis. Several banks and financial experts were worried about how the new regulations will affect the banking sector. The Democrats expressed their concern that the banks may blow up the economy once again. Tougher restrictions were enforced to ensure consumer protection and financial stability. However, the restrictions failed to include the cost of forgone growth. As a result, banks have a tough time in increasing their profits which affected their stock prices.
Trump has ordered the Treasury Secretary to provide a complete report on the growth, competitiveness, and efficiency according to the current regulations. This report must be presented in 120 days. Trump’s White House is focused on improving economic and lending growth of the banks to improve the profits. The new regulations will help the banks to enjoy a balanced supply of credit.
In 2010, Dodd-Frank Act was imposed by Barack Obama with new rules on derivatives and mortgage underwriting. Consumer Financial Protection Bureau was set up to enhance consumer protection while the financial institutions had limits on speculative trading. Credit cards too didn’t escape from the regulations. The CARD act increased the minimal requirements for capital and liquid assets that must be maintained by the banks. International money transfers, auto loans, and mortgage loans were scrutinized heavily. The Department of Labor also discouraged charging commissions by investment advisers for using retirement accounts.
Even though new regulations were imposed, there was no clarification on the extent of the usefulness regarding risks and associated costs. Banks were safer, but the limitations on trading were not contributing to their profit. Credit growth of banks is difficult to measure even though tighter regulations will increase the credit cost. Goldman Sachs in 2015 has reported that the heightened regulations favor huge enterprises and impose a burden on small and medium-sized businesses and startups. The market gained by 50%, but the banks struggled to reach their pre-crisis peak due to the burden of the regulations.
The executive order by Trump will result in an assessment of regulatory impact analysis to create new rules. These will help the investors to make better investment decisions. Retirement savers were not charged for the investment advice as Obama Administration claimed that investors could save $17 billion a year without the fees. However, the Security Industry and Financial Markets Association argued that the fees would be utilized for providing other services.
The current capital requirements will not be raised by the Trump administration. Experts also feel that it won't be rolled back to the previous levels as well. The financial stocks have gained 17% ever since the executive order was signed as the new regulations relief will help the banks to earn more profits. As banks generate more profit, the cost of credit will decrease and it will benefit households and businesses with poor creditworthiness.