The View

Global financial rules: Trump looks determined to rip them up and start again

Painstakingly adopted since the 2009 financial crisis to eliminate the need for government bailouts, the president-elect’s blurred policy plans are becoming a serious cause for concern

PUBLISHED : Thursday, 24 November, 2016, 4:52pm
UPDATED : Thursday, 24 November, 2016, 4:52pm

Donald Trump’s election victory is no longer a mystery, but his policies remain an enigma.

Trump has absolutely no intellectual baggage and he has become president-elect purely on the basis of his strategies and rhetoric, all of which has produced a healthy level of fear and loathing.

It already appears Trump will try to rip up global financial rules that have been painstakingly developed and adopted by banks since 2009. His transition team announced on its website that first on his list if likely to be dismantling the Dodd-Frank Act.

If the intention is to “make America great again” by “putting America first” it will certainly accomplish it at the expense of global financial stability.

Dodd-Frank is a sprawling body of legislation regulating to American banks and financial institutions. But, its most controversial aspects include the Consumer Financial Protection Bureau and how it regulates community banks and smaller regional financial companies in the US that service small businesses and consumers.

Critics heap scorn upon the controversial and prohibitively costly level of regulatory burden that they claim cripple lending to the real economy and hinders employment growth.

Today’s vengeful populist politics mean that depriving small businesses of loans and families of mortgages only entrenches “big banks” and their culture of being “too big to fail” at everyone’s expense.

Since 2009, banks around the world have invested much in the law, which is ultimately supposed to eliminate the need for government bailouts.

The public doesn’t realise that the dirty secret among bankers is that as an asset class small business loans can’t be diversified and tend to fail altogether in an economic downturn.

Reinstating a nostalgic version of the Depression-era Glass Steagall law separating traditional lending from investment banking is impossible, because of the blurred borders among modern banking products.

Dodd-Frank will be difficult to dismantle and replace. The tyranny of government and big banks exists in a parallel universe resulting in conflicting policy solutions. The incoming administration needs to discern the differences.

Asian and European banks also suspect that the principles of Basel IV and other enforcement actions have been designed to penalise Asian and European lenders to the benefit of US institutions.

For example, Asian and European mortgages, unlike US ones, tend to be kept on a bank’s balance sheet, making the concept of risk floors a more onerous issue.

Trump’s proposed policy reversals could also overturn many assumptions for risk management. The US domestic regulatory agenda would hurt non-US rivals more than domestic, Wall Street banks.

It is similar to Trump’s intention to abandon the Trans Pacific Partnership trade deal as soon as he assumes office. The goal is to replace them with international agreements that are more favourable to American banks.

A number of European and Asian policymakers have publicly criticised some of the core demands of Basel IV, such as the principle of a minimum floor for banks’ calculation of the riskiness of their assets and their capital requirements.

Ironically, macroeconomic uncertainties in Europe from Brexit and a slowdown in Asia’s economies may actually benefit from Trump’s move to relax financial regulatory reforms. Entirely unpredictable policy decisions are possible in a Trump administration.

Dodd Frank is the outcome of agreed-upon principles by the G20 countries. Although its deconstruction would alleviate the regulatory burden for US financial institutions it would immediately result in adjustments by Asian and European institutions.

Risk management sometimes creates new risks even as it brings old risks under control. Institutional faith in risk management encourages them to take risks they would not otherwise take.

That may appear beneficial and profitable, but governments and bankers must be wary of adding to the total amount of risk in the system through misguided policies.

Trump recognises the immense appeal and opportunity of an American restoration. All nationalism finds its foundations in a glorified, mythical past.

His policies will run against those of President Barack Obama, who was too cautious and chose not to exalt the exceptional nature of the US, but rather accept constraints based on the reality of permanently diminished power.

However, the past seldom cooperates and reveals to us when chaos and volatility will burst out in the future. Wars, depressions, stock market booms and crashes, and ethnic massacres come and go, but they always seem to arrive as surprises.

Managing asset and credit concentration, liquidity and exposure to capital markets remain inescapable principles of banking.