Trump moves ‘too big to fail’ goal posts

Deregulating the banking sector was on Trump’s to-do list in the lead up to the 2016 election. Now that he’s in power, the Dodd-Frank Act is finally being scaled back after winning congress approval on 22 May.

“Dodd-Frank was something they said could not be touched. And honestly, a lot of great Democrats knew that it had to be done and they joined us in the effort,” Mr Trump said.

“And there is something so nice about bipartisan, and we’re going to have to try more of it. Let’s do more of it.”

The rollback is aimed at easing restrictions for regional and community banks by raising the “too big to fail” threshold from $50 billion in assets to $250 billion. Under the new regime, only 13 US banks are now considered systemically important to the American economy: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, US Bancorp, TD Group, PNC Financial Services Group, Bank of New York Mellon, Capital One Financial, HSBC (North America) and State Street.

However, Fitch Ratings believes that dismantling core parts of the 2010 Dodd-Frank Act could have negative implications for the US banks over the long term.

“Key attributes of the legislation raise the systemic threshold to $250 billion from $50 billion for enhanced prudential standards (EPS), reduce stress testing requirements and modify applicability of proprietary trading rules (the Volcker Rule),” the ratings agency said.

“The legislation reduces regulations for US small- to mid-sized banks in particular, while only providing de minimis regulatory relief to the largest US banks.

“The change to the systemic threshold reduces the number of banks subject to heightened regulatory oversight to 12 from 38. Regulators will still have discretion to apply EPS to banks with $100 billion to $250 billion in assets. Banks above $250 billion in assets would not see much benefit from the legislation.”

According to Fitch, the biggest potential change to regulatory and capital requirements is for banks under $100 billion in assets, exempting them from DFA stress test requirements.

“From Fitch’s perspective, stress testing has provided discipline for banks and is an important risk governance practice that is considered in its rating analysis. The elimination or meaningful reduction of stress testing would likely have negative ratings implications.”

[Related: Responsible lending — insights on evolving regulations]