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. Those practices 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.
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.
However, retired Massachusetts legislator Barney Frank, one of the driving forces behind the Dodd-Frank banking reform bill, told AFP he was satisfied his namesake legislation had survived and would continue to flash warning lights if banks get into risky situations. That will ensure the government is not again forced to use taxpayer funds to bail out a financial institution.
Rolling back regulation
Still he remains concerned about what 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."
"It is very clear that well over 95 percent of that bill in terms of its importance is now rock solid," Frank said in an interview, referring to the reform Congress passed this summer.
The only area where there has been serious damage has been from Mick Mulvaney, Trump's interim choice to lead the CFPB, a frequent critic of the agency's very existence, let alone its aggressive enforcement, he said.
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.
New cases have come to a halt since he took over, according to reports, and officials have reversed or weakened scrutiny of auto loans -- one of the fastest growing types of debt nationwide -- payday lenders, and data to track racial discrimination in home mortgage lending. "I regret that but that's not a stability issue," Frank said. And the agency has not been changed through legislation and could be restored by a future administration.
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 Mulvaney, a White House budget official, had "deeply politicized" the agency, weakening its role as "an active police force" that guards against misconduct by financial services providers.
And while he agreed 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."
Banking rules eased
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.
"It's true the Trump people are talking about being less rigorous with the regulations," Frank said. But "every one of those rules is going to remain in place," and if their optimism that the private sector has learned its lessons proves to be wrong "all the levers are there to stop it long before it reaches crisis."
"I feel gratified that our work has held up," politically and economically, he said.
Congress did ease scrutiny of smaller banks -- defined as those with less than $100 billion in assets -- while those with over $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.
Particular focus is on financial instruments that exploded in the years leading up to the crisis, which packaged home mortgages -- particularly to less creditworthy borrowers -- into securities that were sold off, passing the risk along to investors.
But 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 subprime 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."