Mind the Gap

Ignore Trump’s Game of Thrones intrigues, the winter of disruption is really coming

PUBLISHED : Sunday, 27 August, 2017, 11:16am
UPDATED : Sunday, 27 August, 2017, 7:47pm

Ignore the daily Game of Thrones power struggles in Donald Trump’s White House.

To “Make America Great Again” requires sweeping deregulation of every aspect of the American economy. That includes relaxing, amending or eliminating important banking rules that have been in place since the 2008 financial crisis.

Changes that Trump and his staff are proposing will result in massive and unpredictable changes in risk management, capital adequacy, and conduct regulation that threaten every financial institution and country - at a time when markets are at their most risky levels.

The motivations behind the lobbying by US investment banks such as Goldman Sachs and JPMorgan Chase & Co. will lead to unintended outcomes.

At worst, they will be catastrophic if they worsen the ability of bank managers and regulators to deal with the next financial crisis. Institutions around the world have spent billions of dollars on new compliance and risk control systems as well as an army of managers to meet current standards. Technical overhauls and major changes will be costly at this point.

In April, Trump fulfilled his promise to start scaling back the Dodd-Frank Act. Treasury Secretary Steve Mnuchin concentrated on two specific sections of Dodd-Frank: the Orderly Liquidation Authority (OLA), which authorises the government to resolve or take control of financial firms during a crisis. And the other is related to the power of the Financial Stability Oversight Council (FSOC), a panel of regulators empowered to designate institutions as systemically important (SIFI or GSIFI), which makes banks subject to increased government supervision.

Trump vowed “to do a number on Dodd-Frank.” He and Mnuchin argued that the entire regulatory framework is too complicated. It reduces and discourages banks’ borrowing and lending activities- and hence their profitability. US investment banks are also seeking to return to the lucrative business of proprietary trading, which the Volker Act barred.

Banks have been complaining for the last two years that Dodd-Frank’s strict capital regime hurts their ability to do business. JPMorgan chairman and chief executive Jamie Dimon warned that US banks are presently carrying too much capital. Never mind if there is such a financial concept that banks can be overcapitalized. Big banks are posting record profits, yet they claim they’re being oppressed by regulators. So over-capitalisation translates into lower return on equity, which ultimately impacts bankers’ bonuses.

These major changes will cascade into other areas of financial regulation that will be followed globally. This month, some regulators relaxed a plan to restrict bonuses on Wall Street that had been opposed by banks and brokerage firms. And then last week the US Labor Department disclosed an 18 month delay in rolling out the Fiduciary Rule that require brokers to act in clients’ best interests whey they handle retirement accounts.

Trump is facing opposition in passing legislation in Congress. But his administration is making progress in amending or sidelining some of the rules that Wall Street has sought for years to overturn or subsume. One way to do it is to appoint bureaucrats who simply do not enforce them if Congress cannot enact new ones.

So it is no surprise that senior Wall Street executives, rather than Treasury department bureaucrats are leading the reform push from within the government.

“It is time to … determine where the pendulum has gone too far,” Craig Phillips, counsellor to Mnuchin, told a government advisory committee on July 20th at the Federal Reserve Bank of New York.

Phillips, a former investment banker and senior executive at BlackRock Inc., has been leading the administration’s campaign to identify key changes to financial regulations.

Many of these changes will be reflected internationally through organisations such as Basel Committee, which will have to amend many of its reforms. After all, non-US banks will demand to follow Trump’s deregulation in order to remain competitive.

Sadly, an even greater crisis will emerge from eliminating the very regulations that keep bankers from looting pensions, selling fraudulent financial products, designing mortgages that lead to foreclosures, setting up fake customer accounts, forcing borrowers to buy unnecessary insurance, charging excessive banking fees, forcing depositors to support bail-ins and coercing taxpayers to pay for bailouts.

Peter Guy is a financial writer and former international banker.