While President Trump is convinced that the Dodd-Frank rule is now becoming a burden on US banks, Mario Draghi, ECB President has expressed concerns on this matter. In a hearing on Monday, the premier of the European Central Bank said that “the last thing we want at this point in time is a relaxation of regulation.” President Trump, on the other hand, is sure that more lending in the economy will be fueling growth. While signing an executive order last week he said, “I have so many people, friends of mine, who have nice businesses who can’t borrow money.”
President Trump wants to recheck a few parts of the Dodd-Frank regulations which do not allow banks to lend more. The regulations were put in place after the 2008 crisis which was fueled by excess lending to less creditworthy candidates and brought about a recession. Here are 3 reasons why Draghi thinks that Dodd-Frank should stay.
Draghi expressed his discomfort in Frankfurt with the US revisiting the Dodd-Frank regulations. He said, “Frankly, I don’t see any reason to relax the current regulatory stance which has produced a much, much stronger banking- and, generally, financial services—industry than we used to have before the crisis.”
He is right in the observation because a weaker financial sector could mean problems for the entire world. The US recession of 2008 impacted the global economy and led to slow growth rates and loss of jobs. If the regulations are removed now, at a time when the global economy is still under pressure, a new problem will be unleashed upon the central banks to maintain a strong financial sector.
Trump suggests that many of his friends with great businesses are not able to get credit from banks. He is right in suggesting so. However, if the regulations are relaxed too much, many creditors with less creditworthiness may also be given loans. This can create a situation just like the pre-2008 era where unchecked lending led to a crisis. The US has a very strong credit availability scenario. The Dodd-Frank imposes a few checks that help prevent the financial bubble that wrecked the economy eight years ago. When banks exercise more lending control, the chances of high creditworthy individuals and companies securing loans increase. US banks have gotten stronger internationally after the regulations were introduced.
Even if Dodd-Frank is rescinded to increase credit, the timing for this decision could create waves in the global economy. Many analysts are already predicting an imminent recession in the US in 2017 or early 2018. Globally, interest rates have been near zero for about eight years. If the policies are eased now and more financial deregulation follows, the economy could enter another recessionary phase.
Dodd-Frank can be tweaked, but playing with the basic structure of the regulation could do more harm than good. Barney Frank who helped create the legislation said that smaller banks are often caught up in complying with the regulations instead of banking. So, Dodd-Frank, considering the current times, will be a better regulation for global economy if it stays.