Dodd-Frank Act: Banks Profitability And Capitalization

The Dodd-Frank Act to be blocked by the new administration.

U.S. Banks capitalization increased since the financial reform came into force.

No negative impacts on banks profitability so far.

The new President Donald Trump signed an executive order on core principles for regulating the U.S. financial system through a review of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the law passed under the Obama administration to ensure financial stability after the 2007 crisis.

The reason would be linked to the fact that the U.S. banking system is too capitalized at the moment and restricted by an exaggerated regulation.

As declared on Fox Business by Gary Cohn, chief economic advisor to President Donald Trump, banks have enough capital and more rules would reduce profitability and loans to the real economy.

However, is it true that U.S. banks are too much penalized? Has the Dodd-Frank act really contained the banking business?

I tried to analyze 4 factors to demonstrate that the Dodd-Frank Act has not been an obstacle to the banking business:

  1. Profitability
  2. Capitalization
  3. Bank loans trends
  4. Stock market prices

Factor n.1

On average, the profitability growth rate of the U.S. banking industry (measured by the ROE) increased on average in the last years, in contrast with European banks. The reason lies in a timely and effective intervention by the U.S. regulatory institutions, which helped banks to obtain a more sustainable and prolonged recovery from financial crisis.

Figure 1 shows, for example, the return on equity of the 5 biggest U.S. banks in the period 2006 – 2014; after a strong decrease, profitability rose due to the financial crisis in 2007.

Even if the second quarter of 2014 was characterized by a slight decline, in the third quarter of 2016, the industry reported an increase of 12.9%, relative to a year earlier, with a net income of $45.6 billion.

Figure 1 ROE of Top 5 U.S. Major Banks

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