US president Donald Trump has called Dodd-Frank a disaster and plans “to do a big number” on it. This push back on regulation could also find its way into Europe, writes Brian Caplen.

An end to stress testing, less onerous resolution planning and less powerful regulators – these are the prizes on offer for smaller banks under US president Donald Trump’s announced review of Dodd-Frank. But there is a tough edge – banks that get into trouble under this system would almost certainly be allowed to fail.

The aim would be to return banking to a more market-oriented system where banks are freer to lend but must take the consequences of their actions. The largest banks – the GSIBs, or globally systemically important banks – would probably be excluded and carry on operating under the old rules.

Since repealing Dodd-Frank means pushing new legislation through Congress, the vehicle for these changes would be the Financial Choice Act (FCA) introduced in 2016 by Texas Republican Jeb Hensarling, who heads the House Financial Services Committee.

Proposals under the FCA are wide ranging and include removing the authority of the newly created Financial Stability Oversight Council, which was designed to identify systemic risk, as well as watering down the Volcker Rule on proprietary trading and reviewing the position of Fannie Mae and Freddie Mac.

There must obviously be concern over anything that increases systemic risk, because even if this administration has the appetite for letting banks fail, a future administration may not. But if the GSIBs could be bound into the old system while smaller banks are set free to lend sensibly to small businesses and home purchasers, the changes could be positive for both US banks and the economy.

While Goldman Sachs shares rose on the back of the Trump announcement, the big Wall Street players are unlikely to be the beneficiaries of these reforms. Smaller players will be the winners but the crucial issue will be the definition of small. Is it $50bn in assets or $500bn, as has been suggested by some?

In any case, the notion that smaller banks have been unfairly constrained by the mass of financial regulation enacted since the crisis is not purely a Trump phenomenon. Bundesbank executive board member Andreas Dombret argued in the January issue of The Banker for a different set of rules for smaller regional banks

Brian Caplen is the editor of The BankerFollow him on Twitter @BrianCaplen

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