Throughout the presidential election, now-President-elect Donald Trump has vowed to undo the financial service industry reforms contained in the Dodd-Frank Act. The Trump transition team’s website makes it clear that the issue hasn’t been forgotten, saying that Trump will work to “dismantle the Dodd-Frank Act and replace it with new policies.”
In an appearance on Capitol Hill Thursday, Federal Reserve Board Chair Janet Yellen delivered her verdict on the suggestion: bad idea.
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Yellen was delivering regularly scheduled testimony before the Joint Economic Committee when she was asked by Rep. Carolyn Maloney (D-NY) for her thoughts on the law that placed new restrictions on the financial services industry in the wake of the financial crisis that led to the Great Recession.
“We lived through a devastating financial crisis and a high priority for all Americans I think should be we that want to see put in place safeguards through supervision and regulation that result in a safer and sounder financial system,” Yellen said. “And I think we have been doing that and our financial system as a consequence is safer and sounder and many of the appropriate reforms are embodied in Dodd-Frank.”
She cited a number of beneficial effects she believes the law has had, with regard to the stability of both individual financial institutions and on the broader financial system itself.
Among other things she noted that banks now carry more capital to cushion against losses and have much more stringent liquidity requirements. Derivatives trading has been centralized and more closely regulated, and regulators have far more authority than they used to when it comes to liquidating the assets of a failing bank.
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She said that the requirement that the largest banks create so-called “living wills” to assist in an orderly liquidation of their assets in the event of failure has not only reduced the perception that some banks are “too big to fail” but is also “really changing the mindset of large financial firms about how they need to run their businesses and making them safer and sounder.”
She said, “I think Dodd-Frank was very important in fostering those changes and we should feel very glad that our financial system is now operating on a safer and sounder footing.”
Maloney asked if Yellen believes doing away with Dodd-Frank would make a new financial crisis more likely.
“I certainly would not want to see all the improvements that we have put in place, I wouldn’t want to see the clock turned back on those because I do think they are important in diminishing the odds of another financial crisis,” Yellen said.
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In the course of her testimony, Yellen also indicated that even in the wake of last week’s unexpected election results, the economic indicators that the Fed’s Open Market Committee consults when determining appropriate target interest rates were not dramatically different. They continue to signal the kind of improvement in the economy consistent with a slight uptick in rates in the near future. (The FOMC meets again next month.)
Yellen also said that she has every intention of remaining in her position as Fed Chair through the end of her term in 2018. At that point, President Trump would have the option to reappoint her, or replace her as head of the independent central bank.
