In May, President Trump signed the rewrite of the 2010 Dodd-Frank law passed earlier by Congress with rare bipartisan support. The bill is the biggest rollback of bank rules since the financial crisis. According to the new law, lenders with less than $10 billion in assets will be exempted from the Volcker rule that bans proprietary trading. Moreover, the bill eases rules on all but the largest institutions, raising the threshold by which banks are considered systematically important and, thus, subject to tighter oversight from $50 to $250 billion in assets. The smallest banks between $50 and $100 billion were immediately freed of stricter regulations, while depository institutions between $100 and $250 billion in assets will be exempt from them beginning in November 2019, although they could still be subjected to the Fed’s enhanced supervision in times of need. Last month, the Fed just unveiled a proposal for the implementation of several major provisions of the new bill.
It is, therefore, good time to ask two questions. First, how will the rollback of Dodd-Frank Act affect the gold market? Second, are we safer a decade after the Great Recession – and what does it imply for the precious metals?
The regulatory reform makes things easier for small- and medium-sized U.S. banks, as they will save millions of dollars in regulatory compliance costs. The banking sector will benefit at the expense of gold, which is considered as a safe-haven asset, hedging against the folly of the financial sector. Moreover, with eased regulations, banks could increase their lending to households and companies, which would support economic growth, deterring gold from shining.
Some people say that the new bill is poorly timed and it may only add fuel to the fire, as banks are flourishing now. Indeed, let’s note that eased regulations will be implemented during Fed’s tightening of monetary policy, enhancing the positive impact of higher interest rates on banks (ZIRP and flat yield curve are detrimental for banks’ maturity transformation). However, thanks to the reform, the financial conditions could remain longer accommodative despite all the Fed’s hikes. So, it seems that the good prosperity may take longer. As gold needs recession or at least a slowdown to shine brightly, it is bad news for the bullion.
