The Dodd-Frank Act, one of the central components of post-financial crisis reform in the U.S., likely won’t be repealed in full by the new U.S. administration, but a rollback in regulation will likely be a key theme for the U.S. financial services sector in the year ahead, says Fitch Ratings Inc.
Fitch is not expecting a full retraction of the Dodd-Frank reforms, but the credit-rating agency does say that certain provisions of the rule may face substantial revision in the wake of U.S. President Donald Trump’s pledge to do “a big number on Dodd-Frank.”
At this point, Fitch says it’s unclear which, if any, deregulation policies the new administration will pursue. However, it suggests that the Financial Choice Act that the Republicans proposed in 2016 “may serve as a blueprint for some of the changes ahead.”
That proposed legislation “is broad in scope and includes proposals to change financial institutions’ activities, modify and potentially reduce financial regulators’ authority, limit regulatory burdens for certain [financial institutions], add greater congressional oversight of regulators and propose reform to market infrastructure,” Fitch says.
The most significant change for the markets would be the proposed restructuring of the U.S. Federal Reserve Board, including how it sets interest rates, as well as its authority as a central bank, Fitch says. In addition, the proposed rule calls for restructuring the Consumer Financial Protection Bureau (CFPB), adding congressional review of financial agency rulemaking and subjecting agencies’ rulemaking to judicial review, it notes.
These reviews “could hamper agencies’ effectiveness and significantly impede their ability to issue new rules, which could have an overall negative effect on the system,” Fitch says.
Furthermore, restructuring the CFPB would lower compliance costs and reduce potential fines, but would also “lead to weakening control frameworks,” Fitch suggests.
Ultimately though, Fitch says that forecasting the credit impact of a major deregulation initiative without specific policy proposals “would be premature.”