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Regulatory intelligence

The Trump Presidency: Financial regulation enters the post-crisis era

Phil Cotter  Managing Director, Thomson Reuters Risk business

Phil Cotter  Managing Director, Thomson Reuters Risk business

In an interview with Fox in August President elect Trump said “We need to repeal the Dodd-Frank Act… banks are not lending to the people who need it.” Suggesting very clearly that financial regulation was having a detrimental impact on economic growth.

Elsewhere there has been significant speculation that he will place a moratorium on any new financial regulation and repeal some of the regulation implemented under Obama’s presidency that he believes is having a detrimental impact on the U.S. economy and its ability to grow.

What is not disputed is that regulations have become more complex and increasingly costly for financial institutions to meet.

A report by the Centre for Capital Markets Competitiveness, a department of the U.S. Chamber of Commerce, published in June 2016, suggested that 75% of the companies they surveyed said that financial regulations and consumer protection regulations implemented since 2010 had, had a significant impact on their ability to raise finance. This applied to small, medium and large companies and the biggest impact was said to be their ability to finance liquidity and cash-flow with companies citing increasing difficulty in raising short term capital, managing foreign exchange risk and accessing credit.

The report further claimed that not only was this having the impact of raising costs for the companies but that impact was being felt by customers and employees of the companies through higher costs and job losses. At the time of the survey the majority of companies indicated that they expected regulatory impacts to get worse over the next 3 years.

Taken at face value the conclusions of the report suggest a direct impact on companies on main street and their ability to grow and hence the wider U.S. economy.

But is there a direct connection between regulation and economic growth?

Perhaps not surprisingly opinions are split on this matter, as they are on the effectiveness of the regulations that have been implemented to prevent another global banking crisis.

What is not disputed is that regulations have become more complex and increasingly costly for financial institutions to meet.

Andrew Haldane, Chief Economist and Executive Director of the Bank of England and a critic of the increasingly complex capital calculations under the Basle regulations, in a speech in 2011 to the American Economic Association in Denver said “consider the position of a large, representative bank using an advanced internal set of models to calibrate capital. Its number of risk buckets has increased from around seven under Basel I to, on a conservative estimate, over 200,000 under Basel II. To determine the regulatory capital ratio of this bank, the number of calculations has risen from single figures to over 200 million”.

Elsewhere others have pointed out that the increasing drive to standardized regulations globally has failed to take account of the differences in both the risk profiles and economics of individual banks and the economies in which they operate and in doing so they have not significantly reduced the risk of future crises.

If there is one thing that compliance & risk professionals are used to dealing with it is change and I’m confident they will be up to the challenges ahead.

With respect to the cost of regulation and the impact on economic growth opinions are divided. However an IMF Working Paper on Monetary & Capital Markets published in September 2012, estimated that the impact of Basle III on U.S. GDP growth would be negative 0.6% during the period 2011-2015 falling to negative 0.10% over the period 2012-2019.  The difference in the impact over the longer term being the higher costs during the transitional period immediately after 2011 as the new regulation came into force. The IMF forecasts were at the higher end of the range compared to similar forecasts by the Organisation for Economic Co-operation and Development and the Bank for International Settlements but all forecast a negative impact.

The consensus amongst economic experts at least is that in the longer term financial regulation has a minimal impact on economic growth and the benefits outweigh any transitional costs by creating a safer banking industry. However we know that President elect Trump seems to be keenly guided less by experts and more by select segments of main-street and his business instincts.

Whatever the truth of the matter for the first time since the financial crisis we are about to see whether a major economy will begin to roll back some of the financial regulation that has been implemented since the crisis in an attempt to increase economic growth.

Furthermore the U.S. which has been a leading driver of global financial regulation is likely to take more of a back seat in certain areas.

What that ultimately means for the U.S. financial industry, its economy and the global financial regulatory landscape only time will tell. For compliance and risk professionals, particularly for those operating in global organizations, it may herald a period of further uncertainty and even complexity with the prospect that the global regulatory landscape could become fragmented and balkanized as the new president begins to implement his agenda. But if there is one thing that compliance & risk professionals are used to dealing with it is change and I’m confident they will be up to the challenges ahead.

Learn more

What President-Elect Trump means for finance and economics 

Trump’s win clears the way for reshaping financial regulation and compliance

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