In response to Donald Trump’s win, industry professionals have begun considering the implications that his presidency will have for the financial industry. The specifics remain uncertain: The president-elect made only broad commitments on the campaign trail, although they implied comprehensive and ambitious reforms. The political reality is that bringing about major changes will require a considerable alignment of priorities between the administration, congress and industry stakeholders.
Currently, such an alignment is not immediately obvious between the early shell of the new administration and congressional Republicans. For example, Trump stated that he would work to repeal Dodd-Frank and replace complex regulations with simple ones. While many in the Republican-led Congress believe the regulations of Dodd-Frank to be onerous inhibitors of growth, the only ready alternative proposed by the House Financial Services Committee, the Financial CHOICE Act, is itself a complex and onerous partial solution. Perhaps most saliently, we would question the commitment to yet another season of burdensome change on the part of financial institutions, also vis-à-vis the political reality that Republicans do not have a supermajority in the Senate.
All of this signifies that sweeping regulatory change probably will not arrive in the near term. More likely, the industry will see a softening trend for enforcement of existing regulations and the weakening of the enforcers.
It is clear, however, that some aspects of the current discipline are on the table.
What’s on the Table
- Changing how regulations apply to small and midsize banks – Dodd-Frank’s rigorous regulatory standards apply quite broadly to banks large and small. Large banks have coped with its costs without serious impairment to their ability to invest. However, for smaller banks, money spent on regulation means less investment in product development and institutional evolution, putting them at a disadvantage to attract customers that want innovative products and services. Trump also criticized requirements that smaller banks hold high capital ratios that limit their ability to help local small businesses grow. In keeping with an electoral message of robust support to Main Street, he might call for changes to relieve the burden on smaller banks without changing the rules for large institutions.
- Financial Stability Oversight Committee (FSOC) – The FSOC has unilateral power to declare a bank “too big to fail,” and does so behind closed doors. The heavy regulatory burden this designation brings has been a source of complaint for large institutions.
- Volcker Rule – Investment banks dislike the Volcker Rule’s restrictions on trading for profit with capital that is underwritten by taxpayers. Changing this would defy the electorate’s populist sentiments that brought Donald Trump into office, but the rule is a darling target of congressional Republicans.
- The DOL Fiduciary Rule – This and other regulations and standards still midflight are likely easy targets of the new administration.
- The CFPB and who leads it – The CFPB was formed with strong regulatory powers, giving it near-unilateral authority and a head that can’t be removed outside of gross negligence, similar to that of the Fed. However, a recent D.C. circuit court case could make the head of the CFPB an at-will position, weakening the CFPB’s political autonomy. Although subject to appeal, as it currently stands the administration could appoint a new head, one likely to soften enforcement.
- Hedge fund regulation – Popular opinion remains against hedge funds, which recently have performed poorly and which historically have served as a vehicle to evade regulations. Regulation of these funds will likely increase.
What’s Probably Not on the Table
- Capital requirements for large banks – The strict requirements for capital adequacy – including how much banks must keep for capital losses and how much of this should be high-quality capital – are unlikely to change, especially as global standards also converge upwards.
- Oversight and transparency on derivatives – Eight years after the start of financial crisis, derivatives remain relatively opaque and difficult to understand. The ongoing trend toward transparency will likely continue.
- Regulations affecting high-risk mortgages and lending – No stakeholders want a return to the era where banks can sell whatever mortgage to whatever buyer.
- CEO pay packages – Maintaining shareholders’ right to vote on executive pay packages keeps with the values of the president-elect’s supporters and is likely too dangerous a banner topic for the Administration’s early days.