After the financial crisis of 2007-2009, 8 trillion dollars were lost in the stock markets and the financial system was restructured. The fines that were applied related to this stage amounted to 350billion dollars and were assigned to the major banks of the United States and the world. As a consequence of this there was a reform initiated by the G20 in London in March of 2009. As a result, in the United States there was, a partial regulatory law, instituted by Senators Christopher Dodd and Barney Frank, called The Wall Street Reform and Consumer Protection Act in 2010. Only a few days after assuming the presidency, Mr. Trump emitted an executive order to repeal the act.  The effect has been an increase in bank stock prices.

The Dodd-Frank law created two entities to regulate the financial sector, the Financial Stability Oversight Council (FSOC) -- a council of surveillance on financial stability -- and the Consumer Financial Protection Bureau (CFPB) -- the office of financial protection for the consumer --. Combining these two entities, the Volker rule was created, named in honour of the ex president of the Federal Reserve Board Paul Volcker, that prohibits banks from using resources of the bank for: 1. short term speculation through derivatives, and 2. proprietary trading. Proprietary trading is defined as that which is done by financial institutions on their own account. These practices do not benefit clients and increase the risks of the bank in its operation.

The FSOC was charged with overseeing financial institutions and revising their balance sheets, in order to bring more efficiency and transparency to the financial sector, in order to avoid problems with public money in the banks defined as "too big to fail". The Federal Reserve Board is also a monitor of the big banks through stress controls and is the member bank at the Bank of International Payments (BIS) in Basel, and coordinates global efforts with them.

This law had a restrictive impact in the quantity of financial assets issued by banks, which grew sharply after 1980 with the first law of deregulation of deposit and monetary control institutions that allowed them to merge banks and undid the interest rate caps that the Fed had imposed since 1934, through the Glass-Steagall legislation (see Graph 1). 

Graph 1 Debt securities of financial business (1980-2015) 2007=100.

Trump speaks of reducing the regulation imposed by the CFPB and the FSOC, the bank supervision of the Fed through their measurement of stress "has transformed the banks into risk averse", he says. For him the consequence is a brake on American economic growth due to the small credit expansion. With those same arguments he wants to remove the Volcker rule[1].

Representative Jeb Hensarling is in charge of introducing the changes to the Dodd-Frank legislation in his proposal called Financial Choice Act. The reaction from BIS in Basel was of bewilderment[2].

An important impact on the new direction of financial deregulation was the resignation, on February 10, of Daniel Tarullo, president of the Federal Institutions Examination Council. This organism is in charge of making revisions to American banks that "are too big to fail", since his departure leaves the way more open for deregulation. The stock price of Bank of America rose by 1% half an hour after his resignation on the afternoon of [February]10.[3]

The news of the changes to the law had an immediate impact on the price of bank stocks in New York and London. The NASDAQ Bank Index, that measures the price of stocks of the 24 biggest US banks, has risen 24% between November 8 when Trump was elected, and February 2, 2017 (see Graph II).

Gráph II. NASDAQ Bank Index levels of 10/10/2016 to 6/02/2017.

Source: Elaboration with data from Yahoo finance.

Observing the stocks of the principal European banks, some almost bankrupt, have had a similar increase to those of the American banks growing between October 2016 and February of 2017 by 22.8%, with a great leap after Trump’s election. Without a doubt European banks are confronted by their regulators and must wonder if they will also be deregulated.

Gráph III. Increase in the price of stocks of the principal European banks from 10/10/2016 to 6/02/2017.

Source: Our elaboration with data from Reuters and the London Stock Exchange

The great increase in all bank stock prices is explained partially by the global financial interests of Trump’s economic team as well as his council of economic advisers and the Treasury Department. Bankers foresee that bank profitability will increase considerably with the reduction in regulations of liquidity reserves and the increased demand for capital that  will soon come to Europe.

Kolakoweki in Investopedia calculates that the benefits to the American banking sector, thanks to deregulation, will be along the lines of 120 billion dollars, of which 100billion will be for the 6 largest banks[4].

Banks will use these gains to increase dividends paid and to effect large STOCK REPURCHASE programmes which will significantly raise STOCK prices and PROFITS PER SHARE (P/E index).

All this brings with it a series of complications to the non-American financial complex.  Mario Draghi, President of the European Central Bank, noted that these changes distance the US from the stability objectives agreed in Basel as they reduce the capital requirements of American banks, thus putting the entire global financial complex at risk[5].

Fitch's risk agency stated that diminishing the requirements of capital to American banks will have two negative effects for the financial complex: an increase in systemic risk and an increase in the cost of the debt to them in the world.

A major crisis in the financial complex is beginning to be nurtured.  What is most worrying is that both Latin America and the rest of the world are facing very high levels of financial instability that could put the world economy into an economic ditch deeper than the one that gave us the crisis of 2008.

February 14, 2017

(Translated for ALAI by Jordan Bishop)

Oscar Ugarteche: researcher at the Economic Research Institute of UNAM, coordinator of the OBELA Project, member of SNI / CONACYT.

José Luis Cal: Faculty of Economics UNAM, OBELA Project.