Roll back or roll on?
03 October 2017
Donald Trump鈥檚 presidency has caused all kinds of controversy, but what about his plans for banking regulation? Experts debate his plans to do a 鈥渂ig number on Dodd-Frank鈥�, Obama鈥檚 flagship post-crisis legislation
Image: Shutterstock
Stanley Fischer, vice chair of the Federal Reserve, has described Trump鈥檚 plans to roll back the Dodd-Frank Act as 鈥榙angerous鈥� for the financial system. Is he right?
Stephen Malekian
Head of US business development
Elixium
To the extent that banks are better capitalised, less systemically risky, and back to being profitable, while remaining one of the best performing sectors of the S&P 500 since the election, it鈥檚 hard to muster a counter-argument that rolling back regulation won鈥檛 put the banks back to where they were pre-crisis鈥攁nd so vice chair Fischer is correct.
If one, however, is focused on the broken transmission mechanism of the money markets, the fracturing of pricing and available credit intermediation in the financing markets, as well as certain onerous aspects of Dodd-Frank and the Volcker rule specifically prohibiting banks from holding inventory or taking proprietary risk of any size or duration on specific asset classes鈥攖hen I think he is wrong.
Whenever regulators and central banks intercede in markets and endeavour to make the banking system 鈥済reat again鈥�, there are inevitable repercussions, both positive and negative, that could be worth preserving as well as tweaking, respectively.
My question is: who is clamouring for the rollback of Dodd-Frank? The banks have already front-loaded adherence to the ratios on capital, leverage and liquidity, culled their client list, spent billions on compliance and widened spreads to meet their return hurdles on their internal cost of capital. Even Jamie Dimon, CEO of J.P. Morgan Chase and the self-appointed spokesperson for bank fiscal rectitude and moral virtue, is not calling for it.
Clearly the Devil is in the detail, but there is no ambiguity in what the soon-to-be-erstwhile vice chair Fischer is fearing. I share his concerns.
Alex Lamb
Head of business development for the Americas
and head of marketing
The Technical Company
Opponents of any regulation are typically concerned with cost and liability, not to mention the limitations on adding new business in a firm. While these are real concerns, the victims of the latest financial crisis need a solid safeguard against wrongdoers.
While imperfect, the law brings self-examination of business practices into play: is this reasonable behavior? Are we entitled to do this? What are the consequences? Remove consequences and, as any six-year-old will tell you, it鈥檚 game on.
Do we really believe that grown-ups are different? Leeson, Kerviel, Adoboli, Madoff, Bear Stearns, Lehman, mortgage-backed securities, sub-prime lending were all major situations鈥攁ll in the last 20 years鈥攖hat could have been avoided, saving innocent investors a huge amount of money. There were winners, but we don鈥檛 hear from them, as they are probably pretty similar to those that were caught over-trading, misrepresenting themselves or their products, rigging valuations, and so on. There are too many bad behaviors to list, but plenty that are addressed in Dodd-Frank. If it was rolled back, it would be disastrous.
Paul Burleton
Head of strategy, regulatory, risk and compliance
GFT
Despite President Trump鈥檚 bold promise to 鈥渄o a big number on Dodd-Frank鈥�, there is still no clear way forward for regulatory reform in the US. The US Treasury paper published in June has given us a better understanding of the direction of travel, but there is still much to debate. The Volcker rule has been the subject of such debate since its introduction and there is validity in the argument that it is hurting smaller financial instruments and restricting market making activities.
Removing it completely would undermine the principle that banks protected by the Federal Reserve should not engage in speculative trading for their own account and, sensibly, the report does not propose this drastic step.
The other main area of debate is on the capital requirements. Here, many argue that the Dodd-Frank rules and subsequent amendments have made them overly complicated and restrictive. This is where Fischer has a point.
Although very few would agree with his statement that 鈥渆verybody wants to go back to the status-quo before the great financial crisis鈥�, the US Treasury report is inconclusive on whether the Basel accord would continue to be followed, stating that the regime needs to 鈥渕eet the needs of the US financial system and the American people鈥�.
Clearly, US banks feel constrained under the current environment, but they do need to be held to equivalent standards as their
international counterparts.
Fischer鈥檚 comments serve as a warning shot across the bows of Congress and the regulators alike. As ever, the regulatory reform road is long and winding, but it now seems that most are on board for the ride.
Timothy Smith
General manager
FIS, Kiodex and Astec Analytics
On 25 March 2011, the Wall Street Journal鈥檚 headline was: 鈥楧odd-Frank鈥檚 Threat to Financial Stability鈥�, and within the article there was a one-word piece of advice: 鈥榮top鈥�. We now hear that it will be 鈥榙angerous鈥� to roll back Dodd-Frank. As participants, we could be forgiven for wondering which view is the correct one.
As in all things, the correct position is somewhere between the two. Over the years, the industry has become used to, if not accepting of, creeping regulatory scrutiny. Whole departments have been created and technology has been developed by the major financial IT companies to cope with the additional global reporting.
On the other hand, there would appear to be a general feeling鈥攁nd not just among the affected financial community, but the general populace as well鈥攖hat the balance may have tipped too far one way. All involved hope the pendulum will stop its swing dead center. In the final analysis, it will probably be the case, as per usual, that the predicted dire consequences of removing Dodd-Frank will not arise, but neither will the exaggerated benefits of deregulation be as great as foreshadowed.
Larry Tabb
Founder and research chairman
Tabb Group
Rollback can mean many things and, depending, Fischer could be right or wrong. Completely rolling back Dodd-Frank is not only a mistake, but few even want this to occur.
While banks would like fewer stress tests, they don鈥檛 want them to be eliminated. Similarly, the swaps trading mandate has pushed investors into non-standardised products just to keep them off a swaps execution facility. However, few believe that we should eliminate the clearing mandate.
While Dodd-Frank instilled a more rigorous regulatory environment, the level of compliance and oversight has been an anchor not only weighing down the financial sector but slowing economic growth by hampering lending and curtailing market liquidity. While 40-times leverage may be too much, at the levels of interest rates we have experienced over the past decade, 12- to 15-times leverage may be too low.
Many banks, and increasingly even regulators, are also complaining about the Volcker rule and its overly harsh interpretation of proprietary trading. While allowing banks to proprietary trade using insured deposits may not be a good idea, proprietary trading was not implicated in the crisis and the rule has made it difficult for banks to make markets and provide liquidity.
So, while Stanley Fischer is right about a complete rollback of Dodd-Frank, few, if any, are calling for a complete rollback.
If, however, we want our economy to grow, capital to be appropriately allocated, and risk to be shifted from risk-averse corporations to those more desirous, a rethinking and reshaping of Dodd-Frank is certainly in order.
Eric Litvack
Head of regulatory strategy
Societe Generale Global Banking and Investor Solutions
I don鈥檛 think that one should frame the debate in terms of a 鈥榬ollback鈥� of the regulatory framework.
Certainly we are not in favour of repealing or weakening the regulatory framework. A lot of work has gone into implementing Dodd-Frank and similar financial regulatory reform elsewhere, and the financial system is much safer than it was as a result.
But, 10 years after the financial crisis, and after wide-sweeping reform of all aspects of financial regulation, it does make sense to review and assess the regulatory landscape.
As is the case with many new regulations, the initial rollout of any framework is usually not perfect or all-encompassing, and this is certainly the case for the 800-or-so pages of Dodd-Frank. After all, securities regulations date back to the 1930s, but they鈥檙e still regularly reviewed and improved. There is scope to streamline and simplify certain requirements to remove needless complexity鈥攃omplexity that imposes a hefty compliance burden on intermediaries and end users for little benefit.
It鈥檚 important that these firms can access financial markets and financial services in as cost-effective and efficient a way as possible, with an eye on ensuring that regulation supports sustainable economic growth.
The European Commission started the review effort two years ago with its capital markets union action plan and its review of existing regulation. A similar review of the Dodd-Frank framework is timely and healthy, which is why the Commodity Futures Trading Commission鈥檚 Project KISS and the Treasury鈥檚 review of financial market regulation are so important.
Henry Balani
Global head of strategic affairs
Accuity and Fircosoft
Bank regulation is key to protecting the financial system from abuse. Critics have, however, argued that over-regulation can lead to reduced innovation and effectiveness of the financial system, potentially limiting economic growth. Understandably, there is a variety of opinion on the effectiveness of regulation.
The key point to consider here is the promise of Dodd-Frank. The regulation has been positioned as protecting consumers from abusive bank lending and mortgage practices in the wake of the 2008 financial crisis.
Another key aspect is the increase in capital and liquidity requirements, strengthening banks鈥� balance sheets. The third key provision is the Volcker rule, limiting proprietary trading. Proponents for rolling back the Dodd-Frank Act argue that regulations have held back bank lending.
The data, however, shows that this is in fact not the case, with bank lending increasing since 2013 as the US economy recovered.
Even lending to small businesses (another key argument for rolling back Dodd-Frank) has not been a limiting factor.
However, there is certainly room for tweaking the Dodd-Frank Act. Interestingly, bankers have supported the Volcker rule, agreeing that excessive proprietary trading represents a risk to their balance sheets.
A key request is reducing the cost of complying with regulations, which in turn would lower costs for consumers. Ultimately, wholesale rolling back of the regulation is dangerous, as US banks have benefitted by becoming stronger compared to their European peers, and are potentially in a better position to withstand the next economic crisis.
Stephen Malekian
Head of US business development
Elixium
To the extent that banks are better capitalised, less systemically risky, and back to being profitable, while remaining one of the best performing sectors of the S&P 500 since the election, it鈥檚 hard to muster a counter-argument that rolling back regulation won鈥檛 put the banks back to where they were pre-crisis鈥攁nd so vice chair Fischer is correct.
If one, however, is focused on the broken transmission mechanism of the money markets, the fracturing of pricing and available credit intermediation in the financing markets, as well as certain onerous aspects of Dodd-Frank and the Volcker rule specifically prohibiting banks from holding inventory or taking proprietary risk of any size or duration on specific asset classes鈥攖hen I think he is wrong.
Whenever regulators and central banks intercede in markets and endeavour to make the banking system 鈥済reat again鈥�, there are inevitable repercussions, both positive and negative, that could be worth preserving as well as tweaking, respectively.
My question is: who is clamouring for the rollback of Dodd-Frank? The banks have already front-loaded adherence to the ratios on capital, leverage and liquidity, culled their client list, spent billions on compliance and widened spreads to meet their return hurdles on their internal cost of capital. Even Jamie Dimon, CEO of J.P. Morgan Chase and the self-appointed spokesperson for bank fiscal rectitude and moral virtue, is not calling for it.
Clearly the Devil is in the detail, but there is no ambiguity in what the soon-to-be-erstwhile vice chair Fischer is fearing. I share his concerns.
Alex Lamb
Head of business development for the Americas
and head of marketing
The Technical Company
Opponents of any regulation are typically concerned with cost and liability, not to mention the limitations on adding new business in a firm. While these are real concerns, the victims of the latest financial crisis need a solid safeguard against wrongdoers.
While imperfect, the law brings self-examination of business practices into play: is this reasonable behavior? Are we entitled to do this? What are the consequences? Remove consequences and, as any six-year-old will tell you, it鈥檚 game on.
Do we really believe that grown-ups are different? Leeson, Kerviel, Adoboli, Madoff, Bear Stearns, Lehman, mortgage-backed securities, sub-prime lending were all major situations鈥攁ll in the last 20 years鈥攖hat could have been avoided, saving innocent investors a huge amount of money. There were winners, but we don鈥檛 hear from them, as they are probably pretty similar to those that were caught over-trading, misrepresenting themselves or their products, rigging valuations, and so on. There are too many bad behaviors to list, but plenty that are addressed in Dodd-Frank. If it was rolled back, it would be disastrous.
Paul Burleton
Head of strategy, regulatory, risk and compliance
GFT
Despite President Trump鈥檚 bold promise to 鈥渄o a big number on Dodd-Frank鈥�, there is still no clear way forward for regulatory reform in the US. The US Treasury paper published in June has given us a better understanding of the direction of travel, but there is still much to debate. The Volcker rule has been the subject of such debate since its introduction and there is validity in the argument that it is hurting smaller financial instruments and restricting market making activities.
Removing it completely would undermine the principle that banks protected by the Federal Reserve should not engage in speculative trading for their own account and, sensibly, the report does not propose this drastic step.
The other main area of debate is on the capital requirements. Here, many argue that the Dodd-Frank rules and subsequent amendments have made them overly complicated and restrictive. This is where Fischer has a point.
Although very few would agree with his statement that 鈥渆verybody wants to go back to the status-quo before the great financial crisis鈥�, the US Treasury report is inconclusive on whether the Basel accord would continue to be followed, stating that the regime needs to 鈥渕eet the needs of the US financial system and the American people鈥�.
Clearly, US banks feel constrained under the current environment, but they do need to be held to equivalent standards as their
international counterparts.
Fischer鈥檚 comments serve as a warning shot across the bows of Congress and the regulators alike. As ever, the regulatory reform road is long and winding, but it now seems that most are on board for the ride.
Timothy Smith
General manager
FIS, Kiodex and Astec Analytics
On 25 March 2011, the Wall Street Journal鈥檚 headline was: 鈥楧odd-Frank鈥檚 Threat to Financial Stability鈥�, and within the article there was a one-word piece of advice: 鈥榮top鈥�. We now hear that it will be 鈥榙angerous鈥� to roll back Dodd-Frank. As participants, we could be forgiven for wondering which view is the correct one.
As in all things, the correct position is somewhere between the two. Over the years, the industry has become used to, if not accepting of, creeping regulatory scrutiny. Whole departments have been created and technology has been developed by the major financial IT companies to cope with the additional global reporting.
On the other hand, there would appear to be a general feeling鈥攁nd not just among the affected financial community, but the general populace as well鈥攖hat the balance may have tipped too far one way. All involved hope the pendulum will stop its swing dead center. In the final analysis, it will probably be the case, as per usual, that the predicted dire consequences of removing Dodd-Frank will not arise, but neither will the exaggerated benefits of deregulation be as great as foreshadowed.
Larry Tabb
Founder and research chairman
Tabb Group
Rollback can mean many things and, depending, Fischer could be right or wrong. Completely rolling back Dodd-Frank is not only a mistake, but few even want this to occur.
While banks would like fewer stress tests, they don鈥檛 want them to be eliminated. Similarly, the swaps trading mandate has pushed investors into non-standardised products just to keep them off a swaps execution facility. However, few believe that we should eliminate the clearing mandate.
While Dodd-Frank instilled a more rigorous regulatory environment, the level of compliance and oversight has been an anchor not only weighing down the financial sector but slowing economic growth by hampering lending and curtailing market liquidity. While 40-times leverage may be too much, at the levels of interest rates we have experienced over the past decade, 12- to 15-times leverage may be too low.
Many banks, and increasingly even regulators, are also complaining about the Volcker rule and its overly harsh interpretation of proprietary trading. While allowing banks to proprietary trade using insured deposits may not be a good idea, proprietary trading was not implicated in the crisis and the rule has made it difficult for banks to make markets and provide liquidity.
So, while Stanley Fischer is right about a complete rollback of Dodd-Frank, few, if any, are calling for a complete rollback.
If, however, we want our economy to grow, capital to be appropriately allocated, and risk to be shifted from risk-averse corporations to those more desirous, a rethinking and reshaping of Dodd-Frank is certainly in order.
Eric Litvack
Head of regulatory strategy
Societe Generale Global Banking and Investor Solutions
I don鈥檛 think that one should frame the debate in terms of a 鈥榬ollback鈥� of the regulatory framework.
Certainly we are not in favour of repealing or weakening the regulatory framework. A lot of work has gone into implementing Dodd-Frank and similar financial regulatory reform elsewhere, and the financial system is much safer than it was as a result.
But, 10 years after the financial crisis, and after wide-sweeping reform of all aspects of financial regulation, it does make sense to review and assess the regulatory landscape.
As is the case with many new regulations, the initial rollout of any framework is usually not perfect or all-encompassing, and this is certainly the case for the 800-or-so pages of Dodd-Frank. After all, securities regulations date back to the 1930s, but they鈥檙e still regularly reviewed and improved. There is scope to streamline and simplify certain requirements to remove needless complexity鈥攃omplexity that imposes a hefty compliance burden on intermediaries and end users for little benefit.
It鈥檚 important that these firms can access financial markets and financial services in as cost-effective and efficient a way as possible, with an eye on ensuring that regulation supports sustainable economic growth.
The European Commission started the review effort two years ago with its capital markets union action plan and its review of existing regulation. A similar review of the Dodd-Frank framework is timely and healthy, which is why the Commodity Futures Trading Commission鈥檚 Project KISS and the Treasury鈥檚 review of financial market regulation are so important.
Henry Balani
Global head of strategic affairs
Accuity and Fircosoft
Bank regulation is key to protecting the financial system from abuse. Critics have, however, argued that over-regulation can lead to reduced innovation and effectiveness of the financial system, potentially limiting economic growth. Understandably, there is a variety of opinion on the effectiveness of regulation.
The key point to consider here is the promise of Dodd-Frank. The regulation has been positioned as protecting consumers from abusive bank lending and mortgage practices in the wake of the 2008 financial crisis.
Another key aspect is the increase in capital and liquidity requirements, strengthening banks鈥� balance sheets. The third key provision is the Volcker rule, limiting proprietary trading. Proponents for rolling back the Dodd-Frank Act argue that regulations have held back bank lending.
The data, however, shows that this is in fact not the case, with bank lending increasing since 2013 as the US economy recovered.
Even lending to small businesses (another key argument for rolling back Dodd-Frank) has not been a limiting factor.
However, there is certainly room for tweaking the Dodd-Frank Act. Interestingly, bankers have supported the Volcker rule, agreeing that excessive proprietary trading represents a risk to their balance sheets.
A key request is reducing the cost of complying with regulations, which in turn would lower costs for consumers. Ultimately, wholesale rolling back of the regulation is dangerous, as US banks have benefitted by becoming stronger compared to their European peers, and are potentially in a better position to withstand the next economic crisis.
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