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Risk Change Since Dodd-Frank

Dodd-FrankIn a recent Bloomberg article [1], Mark White discusses how the Trump administration believes banks have done enough to avert another crisis and should have more relaxed financial-strength requirements. However, White said they might not be all that much safer.

According to the article, due to the Volker Rule, which was adopted by Congress as a part of the Dodd-Frank Act in July 2010 and put into effect in July 2015, banks’ trading operations should have become less risky in the last few years. The rule prohibits costly speculative trading that was ever present in 2008.

Total trading assets at the six largest U.S. banks were relatively unchanged from 2009 to when Dodd-Frank was passed. But when looking at combined value risk—which is how much banks expect to lose on a worst-case scenario day—the numbers decreased from $1 billion to $279 million.

The potential losses that value at risk uses is based on data from about a year prior, so it can be misleading. It will register less risk if things are calm, and that has been the case in years following 2009. Adjusting for this, White explained that big bank operations are about 25 percent less risky than 2009, and a bit higher than they were in 2016.

“Make no mistake: Banks should take risks,” White said. “Lending to people and companies is both inherently risky and crucial to the economy. But they don’t have enough equity to absorb the inevitable losses from bad bets, and they’re still taking plenty of risk in areas—such as the trading book—where they should be safer.”