In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was implemented as a reaction to the 2008 financial crisis. The idea of the Bill is to heavily regulate the financial institutions of the US to protect consumers and negate the need for future government bailouts. One of the main features of the Act is the creation of the Financial Stability Oversight Council. This agency aims to oversee and monitor financial institutions and ensure they will not become “too big to fail.” The purpose of the legislation is to stop an institution from becoming so big that its failure would negatively affect the wider economy and therefore require a bailout from tax-payer funds.
Another key part of Dodd-Frank is the Volcker Rule. This rule, named after the former chairman of the Federal Reserve Paul Volcker, restricts banks from investing their own accounts in hedge funds, equity funds and other forms of “speculative” investments that “do not benefit the consumer.” This rule also protects against possible conflicts of interest that might arise from a relationship between a bank and such a fund. Dodd-Frank further regulates banks by ensuring that paperwork for mortgages, credit cards and loans are simple and easy for consumers to understand as well as to protect against risky lending. In other words, Dodd-Frank is designed to limit the level of risk that a bank can take. However, this also simultaneously reduces the bank’s ability to make profit.
Critics of Dodd-Frank including President-Elect Donald Trump, believe that although the restrictions guard against another possible recession, the regulations are far too restrictive and have the effect of stifling liquidity in the market. An illiquid market means that buyers will find it difficult to secure favourable loan terms, a fact which would decrease market activity and ultimately decelerate economic growth.
For these reasons, the newly formed Trump transition team promises to “dismantle” Dodd-Frank. They see the Bill as unnecessary “bureaucratic red-tape” and think that the regulations are choking the financial institutions of the US. Furthermore, the transition team have stated that “big banks got bigger while community financial institutions have disappeared at a rate of one per day.” Hence, they claim that Dodd-Frank has had the exact opposite effect than its intended purpose and therefore it must be reformed (Bloomberg, 2016)
One section of the Bill said to be set first on the chopping block of the future Trump administration is the Volcker Rule. Scrapping the Volcker rule will have the effect of allowing the banks to invest with an increased level of freedom. This will improve the competitiveness of US banks, and more importantly, stimulate the borrowing market as funds will become more available.
Opponents of Trump’s financial services policies believe that a move to dismiss Dodd-Frank is akin to Trump's gambling with the economy as the banks are “let loose” to invest as they please.
If successful, the deregulation that Trump is planning will create more competition in the market. This will force banks to lend more aggressively as borrowers will have more banking options, and this will in turn boost the Real Estate market.