16:16 GMT24 September 2020
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    Easing banking sector regulation could boost US credit issuance and economic growth, but at a cost of possibly lower consumer confidence, another key driver of the economy.

    Kristian Rouz – One of the crucial parts of US President Donald Trump's ambitious program to revive the near-stagnant national economy is his intent to decrease the degree of government interference in the matters of the country's productive forces. In other words, he's pushing for across-the-board deregulation, which he intends to accomplish by repealing restrictive rules and legislation, and making the government abstain from meddling with business activity in the years to come. Trump believes this will accelerate US economic growth.

    From the perspective of economic theory, such an assumption is deemed fully justified, as the US economy in the past decade has become notorious for having an excessive amount of regulations that keep successful businesses from expanding, while helping troubled enterprises stay afloat.

    Among these are the Dodd-Frank Act, which demands that commercial lenders hold larger reserves for a rainy day, thus restraining credit issuance. Another example is the Consumer Financial Protection Bureau (CFPB) – an institution established after the mortgage meltdown of 2007 in order to protect individual borrowers from lending malpractice and fraud.

    Both Dodd-Frank and the CFPB have long been in the crosshairs of the Republican Party, and the Trump administration is likely to amend the banking sector regulations and possibly shut down the CFPB. However, quite surprisingly, an apparently business-friendly move such as repealing Dodd-Frank and closing or reshuffling the CFPB could backfire in the form of lower consumer confidence and possibly even a downturn in consumer demand for financial services.

    Now, of course, as borrowing costs in the US have steadily appreciated as a result of the Federal Reserve's hikes in base interest rates, US consumers are less inclined to go deeper in debt these days. At the same time, domestic consumption drives some 72 percent of the US GDP, and amid the ongoing economic slowdown, the White House would rather not attempt to discourage US consumers from taking loans.

    Repealing and replacing Dodd-Frank with the Republican-proposed CHOICE Act, which would put full responsibility for banking sector stability on the financial institutions themselves and strip the CFPB of its supervisory authority, could boost credit issuance in the US. The question is, would there be greater effective demand for this credit money?

    "That [limiting the CFPB authority] could be a blow for thousands of mortgage borrowers who have used the CFPB's dispute resolution to act as an intermediary in their cases," David Weidner of Trulia, one of the most popular multiple listing services for US real estate, wrote.

    Some 0.46 percent of mortgage borrowers nationwide have applied for CFPB help in their disputes with the banks over their loans between December 1, 2011 and April 10, 2017. Even though the number is not significant, limiting the CFPB's dispute-resolution authority could undermine consumer confidence in the very institution of mortgage lending, which, in the current era of rising borrowing costs, would put additional strain on credit issuance.

    Additionally, many US households are already heavily indebted and there is a debt bubble allegedly forming in the auto loan segment over the overwhelming volumes of non-performing loans (NPL).

    "There should be periodic reviews of regulations to determine if they remain useful. Some regulations may apply to certain time periods or crises that are no longer relevant," Richard Davis, a political science professor at Brigham Young University wrote. "However, the Trump administration's intent is different. Instead, President Trump seems determined to undo whatever the Obama administration did. The motive is not to find outdated regulations, but to satisfy large corporations who don't like government regulations."

    However, the Wall Street banks would hardly welcome the replacement of Dodd-Frank with, for example, the CHOICE Act. Under Dodd-Frank, which major US banks can easily and comfortably afford to have in terms of higher reserves requirements, there is a bailout option for too-big-to-fail financial institutions – good for Wall Street.

    Smaller regional banks and community lenders, however, are struggling to put together enough reserves to comply with Dodd-Frank, and in case of a financial meltdown, they would be the first casualties in line before any bailout would arrive. Therefore, it is the small bank lending that would benefit the most from repealing the Dodd-Frank. Wall Street would not even feel the difference.

    "The President is pushing extremely hard on tax cuts and everything we can do to generate economic growth in the United States. The President [fully] understands how stimulative deregulation and tax cuts will be for the US economy… and he is pushing us all very hard to get that done as soon as we possibly can," the President's Chief Economic Advisor Gary Cohn said earlier this month.

    Still, Cohn emphasized, the first priority of the economic reform package is tax reform. In the light of the recent remarks from Steven Mnuchin of the US Treasury, protractions are likely, not least due to resistance in the Congress.

    Therefore, repealing and replacing Dodd-Frank and overhauling the CFPB would be a lengthier process than it might seem, meaning that by the time the White House actually gets to it, the US will be finding itself in a slightly different economic reality than today.


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    economy, the Dodd-Frank Act, US Consumer Financial Protection Bureau, Donald Trump, United States
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