May 22, 2018 / 10:16 PM / a year ago

Breakingviews - Rollback of Dodd-Frank won’t roll back time

A view of Capitol Hill in Washington August 1, 2011. REUTERS/Joshua Roberts

NEW YORK (Reuters Breakingviews) - The first significant adjustment to post-crisis U.S. financial regulation, passed on Tuesday, is not going to unleash financial Gomorrah. Big banks will barely notice the difference. And even if the deregulatory tide continues, the financial markets have changed sufficiently that the good old days aren’t coming back any time soon.

Congress’s tweak to the 2010 Dodd-Frank financial rules mostly eases restrictions on small and “community” banks, allowing them to make mortgages more easily and loosening some troublesome red tape. Lenders with assets between $50 billion and $250 billion will no longer automatically face tough oversight from the Federal Reserve, but some still may anyway; bonds issued by local authorities will be treated a little more favorably.

It’s more milestone than real change, and less than many Republicans in the House of Representatives wanted. For mega-banks like Citi, JPMorgan or Wells Fargo, the revisions offer almost nothing – although with industry profit hitting a record $56 billion in the first quarter, according to the Federal Deposit Insurance Corp, they’re not in a position to complain.

What comes next could be more interesting to them, if it involves changes to the Volcker Rule – the restriction on deposit-takers trading for their own gain rather than that of clients. Five regulators, including the Fed, want to change the current presumption that all short-term trades are considered speculative unless there’s a paper trail to show otherwise. JPMorgan boss Jamie Dimon once complained traders would need a lawyer and a psychiatrist sitting next to them to gauge the intent behind any given transaction.

Banks certainly made money from their prop trading desks – but even so, the idea that they would rush to reopen them should the rules change seems far-fetched. Some of that trading still happens, under the guise of hedging, but most big banks are more interested in fee-generating businesses like securities underwriting and consumer lending. Much speculative activity - and the star traders driving it - have migrated to hedge funds. Automation means many trades don’t even go near a human any more.

All of this isn’t to play down the significance of Congress’s action. The first change to the post-crisis regime won’t be the last. But just because regulation rolls back doesn’t mean financial history will too.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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