The very idea of reforming financial regulation is a thorny subject. Didn’t we, like, have financial Armageddon less than nine years ago?
And, yet, here is this brazen and brash Yankee president suggesting we now tear up one of the key pillars of legislation that will stop this happening again.
Yet what if he is right?
I have been writing about what has come to be known as the Dodd-Frank Act, and all the other legislation that was conceived in the wake of the GFC (that’s global financial crisis, folks) ever since they first were.
And all I can say is – well, gosh! – it certainly has turned the financial world upside-down.
The capital that banks now need has leapt to astronomical levels. So much so that, unless you are the number one or two in a particular sector or region, you might as well not bother.
The Royal Bank of Scotland is now largely concerned with its British interests, having given up its much-touted worldly aspirations long ago. European legislation similarly claimed the scalp of Barclays, whilst Australian bank ANZ no longer lists Asia as its number one priority. In the US, things have been no less painful, with Morgan Stanley and Bank of America Meryl Lynch visibly retreating from certain areas.
The resulting gaps are filled by those that have the might-of-muscle to move in.
This is not good for competition.
Banks are now much choosier about the business that they involve themselves in, which is to say high-profit and low-capital. Who is to say that this is the best business for them to be in? The regulators and the law-makers are deciding the fate of these business lines, and they don’t even yet comprehend what the consequence of consigning these to an early burial might be; nor, indeed, do they always understand which business lines might be the ones to meet their maker.
I do not wish to be an apologist for the banks’ excesses, which in no small measure led to the collapse of the financial markets in 2008. A former boss of mine revealed what can happen if banks are allowed to run the world, with his excellent 2003 scoop against Goldman’s, the former CEO of which is now a top advisor to the Trump administration.
But banks do also perform an important service. Crucially, they lend money, provide liquidity and oil the cogs in the financial machinery that are right now clogging up with grime.
To repeat my question: what if Trump is right?
Dodd Frank – and other bits of legislation conceived post-GFC – were hastily put together in a sort of panicked and frenzied “ah, what the hell do we do now!?” kind of moment. The public was on the backs of the politicians (they still are) and those in power needed to be seen to be doing something.
There are inconsistencies throughout the legislation that has emerged since the financial crisis.
Here’s a case in point.
Regulator’s no longer trust banks’ internal models – those ingeniously-fabricated algorithms that are supposed to show how much risk a bank is actually taking on, which is then used as a benchmark for how much capital said bank should put aside. Thus for many risks banks now have to use a model ordained by the regulators.
Those same regulators want banks to be able to have an internal model in place so that they can “accurately” report their expected future losses for accounting purposes; which, it would seem, regulators are prepared to trust.
I’m not saying we should just scrap all the financial legislation that has been conceived since the financial crisis.
But perhaps a little bit of tinkering wouldn’t go amiss.
Instead of simply dismissing Trump’s forrays into financial reform as mere bafoonery, maybe we should be prepared to reflect a little bit more.
Just… what if… Trump… is right?