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Post-crisis bank rules survive but US consumers at risk under Trump

Regulators have weakened the agency that guards against misconduct by financial services providers

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Mr Mulvaney has curbed the power of the Consumer Financial Protection Bureau via a hiring freeze and a review of litigation.

Washington

TOUGHER US bank regulations designed to prevent another crippling financial meltdown have survived threats to undermine and weaken them - but the consumer protections that were a key feature remain at risk.

One of the architects of the post-crisis regulations says President Donald Trump's regulators have been "wrecking" the agency designed to shield consumers from some of the deceptive practices that helped precipitate the 2008 financial crisis, included offering products such as interest-only home loans that forced monthly payments to explode in the later years, which the borrower could not afford.

Mr Trump has repeatedly pledged to make cutting regulations a central goal of his presidency and he has support from Republicans in Congress who had been working to dilute the tougher rules on banks.

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Retired Massachusetts legislator Barney Frank, one of the driving forces behind the Dodd-Frank banking reform bill, said that he was satisfied his namesake legislation had survived and would warn if banks get into risky situations.

Still he remains concerned about what Mr Trump's regulators are doing to the Consumer Financial Protection Bureau (CFPB), created by Dodd-Frank, because "the right wing hates this notion that the government has to protect people from the private sector".

The only area where there has been serious damage has been from Mick Mulvaney, Mr Trump's interim choice to lead the CFPB, a frequent critic of the agency's very existence, let alone its aggressive enforcement, he said. Mr Mulvaney has said the bureau "is far too powerful", and has taken steps to curb that power: he imposed a hiring freeze and a review of litigation.

Aaron Klein, an expert on regulations at the Brookings Institution, said: "The biggest change to Dodd-Frank has been the change from Obama-era regulators to Trump-era regulators." "That change dwarfs any legal changes that have occurred to the act, by orders of magnitude," he told AFP, noting that Mr Mulvaney, a White House budget official, had "deeply politicised" the agency, weakening its role as "an active police force" that guards against misconduct by financial services providers.

And while he agreed that a global crisis was unlikely to result from lax consumer protections, "I'm not comfortable with the idea of million of Americans getting ripped off in basic financial services because a regulator in Washington doesn't want to do his job".

Despite some changes, the main pillars of the law requiring increased scrutiny of banks, especially large banks, survived and should ensure the financial system will not be as vulnerable to a crisis, certainly not a crisis created by an explosion of opaque financial products at the heart of the one a decade ago.

And the legislation ensures regulators have the flexibility to take steps to curb new potential threats when they arise. They already have used that new authority against some cryptocurrency investment schemes.

Congress did ease scrutiny of smaller banks - defined as those with less than US$100 billion in assets - while those with over US$250 billion have the toughest oversight, and regulators are allowed discretion with those that fall in between.

The largest banks now must have a "living will" that maps out how the bank would be dissolved if it were faced with a catastrophic crisis, one that would not involve a government rescue. And they are subject to "stress tests" by the Federal Reserve to see how they would perform in certain crisis conditions, and their activities can be curtailed if they fail.

But Mr Klein cautioned that a crisis rarely strikes twice in the same place.

"So I don't know which will cause the next crisis, but I'm fairly sure it's not Dutch tulips . . and not sub-prime mortgages."

"What I am concerned about is a relaxation of the mindset that got us into this crisis, which is the toleration or the ignoring of risky actions because they're generating a lot of short-term profit." AFP