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ANALYSIS: The winners and losers of US financial deregulation

The dismantling of Dodd-Frank would give European banks with ties to the United States a competitive advantage and could influence other nations to adopt a more competitive regulatory scheme.


Kristen McGachey

“If Trump allows the US financial institutions to become all-singing, all-dancing and return to the classic retail/investment bank set-up, Chinese banks might see that as a bit of a threat and accelerate the liberalisation of their own regulation so they can compete in terms of product offering,” said Bailey.

However, financial institutions in, say, Singapore might stick to their guns of “regulatory prudence and toughness,” billing themselves as anti-deregulation and anti-US in their approach, he added.

Like Trump’s plans to drastically cut corporation tax, Schroders UK equities man David Docherty argues looser financial regulation would encourage lending.

“President Trump will govern as a transactional, ‘CEO-president’, reducing predictability and increasing idiosyncratic risks for investors,” said Docherty. “He appears to have a Reaganesque belief in deregulation, tax cuts and government efficiency, yet a New Deal enthusiasm for infrastructure projects and an LBJ-like commitment to social security and workers’ rights. However, he will not be immune to the normal constraints of congressional votes, time and money in furthering his legislative programme.

“Repeal of the Dodd-Frank framework of financial regulation is unlikely any time soon given other priorities, but a relaxation of regulation and enforcement is highly likely and would encourage greater lending activity. On this basis, generally low valuations should provide a favourable basis for continued outperformance despite the sector’s recent rally.”

However, the fact that the merits of regulation versus deregulation is up for debate is interesting from a psychological perspective, said Bailey. It proves that “practitioners, politicians and people in finance have very short-term memories.”

“There is always this waxing or waning from a regulatory perspective. Now that profitability and returns on equities have improved, people are no longer as worried as they were even just a few years ago. We have come full circle.”

Still, “a little prudence is probably wise,” he cautioned. “The issues and challenges of 2007 are not fully over. Governments wouldn’t own half the bond market if they were.”