What’s on the regulatory wish list?
GlobalCapital, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
People and MarketsCommentGC View

What’s on the regulatory wish list?

Trump voter PA 230x150 Nov 2016

Now there’s a chance that the marginalised and downtrodden voters of rust belt America will get what they really want — a wholesale dismantling of the post-crisis banking regulation — the finance industry must ask itself if that’s what it really wants.

With Donald Trump as president, anything seems possible, from the outlandishly unconstitutional to the staggeringly expensive. And that means almost anything in financial regulation is now up for grabs. In the last week alone, Trump has asked for a review of the fiduciary rule (regulating investment advice for American retail), and signed an executive order to review all other financial regulation.

Just before that, Representative Patrick McHenry, vice chairman of the House of Representatives Financial Services Committee, wrote a firey letter to Janet Yellen, chair of the Fed, to ask for a stay on all international regulatory agreements, pending the Trump administration’s review of the regulatory architecture.

So it’s clear that big changes are afoot, and US-based financial institutions can expect some form of deregulation in the next four years. It’s less clear how much of this they should actually want. After all, though 2005 to 2007 were excellent years for, say, fixed income profitability, they did not exactly cover the big banks in glory in the medium term, and bank shareholders won’t be keen to return to those days.

Financial regulation, the larger and more complex the better, also acts as an effective way to protect incumbents from competition. No bank can readily buy another large bank and muscle its way in on the Wall Street giants; the gap in scale between the top firms and the next tier yawns almost unbridgeable wide.

That means, for example, that US companies pay what they must to have one of the top five underwrite their debt and equity offerings in US markets. The heavier the regulatory burden, the wider the moat around the top tier US banks.

The big banks also clearly benefit from some of the CFTC and Fed attempts to coordinate rules internationally. All of them are truly international institutions, and internationally compatible rules on, say, derivatives trading are a clear advantage to them and to their clients.

Compatible capital standards, and the ability to avoid “trapped capital” in individual jurisdictions, would also be an advantage — though this was on the ropes well before Trump took office, with EU proposals to match the Fed’s “intermediate holding company” structure with its own “intermediate holding units”.

There are, however, plenty of candidates for a swift and brutal scrapping. The Basel Committee’s rules on operational risk, for example, are counter-intuitive and damaging. The US majors hold tens of billions in capital to guard against fines they’ve already paid and settlements they’ve already reached.

The Volcker Rule, supposed to curb banks’ ability to do proprietary trading, is another. Quite why holding securities for between a time to satisfy “reasonably expected near term demands of clients” and “over 60 days” is especially bad, or why buying securities with partly your money and partly someone else’s is bad (when either extreme is fine) is unclear. The bright lines between underwriting, acquisition financing, fund finance, prop trading and market-making don’t always exist in the real world — and so Volcker ends up as a mishmash of exemptions and inconsistency, of questionable efficacy in keeping banks from seeking bail-outs.

Other rule tweaks simply wouldn’t matter. For all Congressman McHenry’s bluster about the “global bureaucrats in foreign lands” who made the Basel rules, for all the big US banks, it is the Federal Reserve’s home-grown Comprehensive Capital Analysis and Review (CCAR) stress tests which provide the binding constraint.

Basel rules, to be seen as a global minimum standard, are far more lax, and however dumb they look and however opaque the drafting process, the US has chosen to be super-compliant for its biggest firms and for foreign banks as well.

Having become super-compliant, though, this has become a clear competitive advantage for the US majors (as has a buoyant domestic economy and ill-conceived rule making in Europe). A cursory glance at, say, underwriting league tables doesn’t offer much support for US banks groaning under the weight of foreign regulation and unable to compete.

So US firms should be careful what they wish for, as they try to nudge the careening Trump train in their preferred direction. The regulatory system today is far from perfect, but it has plenty of advantages for them built into it. Tearing it up will have consequences, and needs caution.

Gift this article