Tuesday, November 15, 2016

What Will Mr. Trump Do With the Banks?


By Roy C. Smith

Based on comments last week by Donald Trump, “dismantling” the Dodd-Frank Act of 2010 will be among the first things attempted. What would that mean?

Trump’s position on banks has never been one to encourage them. He has railed against bailouts and the easy treatment of bankers. He is for breaking up the banks and agreed with Senator Bernie Sanders that the Glass-Steagall Act of 1933, that forced a separation between the banking and securities businesses, should be restored.
But he was never a supporter of Dodd-Frank. It was too much regulation, too complex, too expensive and too stifling of banks’ important role in extending credit to business. The Republican Party Platform that he ran on (and largely dictated) called for Dodd-Frank to be repealed and Glass-Steagall reintroduce
The argument supporting repeal is that Dodd-Frank has proven to be vastly more complex and expensive than expected ($36 billion to date, according to one estimate) and is no longer necessary now that the capital adequacy rules of Basel III have come into effect and the Federal Reserve has developed its stress tests and other rules to tighten its control over the banks.
Large US banks also argue that laws that restrict only US banks, but not foreign banks, injure US banks’ ability to compete globally. Smaller banks argue that they had nothing to do with the crisis, and the many constraints of Dodd-Frank shouldn’t extend to them.
Dodd-Frank would have to be replaced by something – Americans are still angry at the banks and distrustful of them. So why not Glass-Steagall? It was simple (only 37 pages long), inexpensive, and provided for stability and safety of the US banking system for 66 years? A Trumpian “deal” swapping Glass-Steagall for Dodd-Frank, which would also involve breaking up the banks, brilliantly delivers three campaign promises in one stroke.
Could Trump get such a deal through Congress? Probably.
Dodd-Frank passed in 2010 in the Senate by a vote of 59-39; the filibuster rule requiring 60 votes in the Senate was not invoked even though the Republicans strongly opposed it. Today, Republicans have a majority in both houses of Congress that probably would support a swap if asked to do so.
Will Trump do this? Hard to say.
Republican Jeb Hensarling (R, Texas) is chairman of the House Financial Services Committee, and someone who has been mentioned recently as a potential Treasury Secretary. He is an arch foe of Dodd-Frank, and the author last June of an alternative approach which gives banks a choice – they can elect to operate in a much less regulated environment if they have the highest so-called Camel ratings (strength measures by bank supervisors) and maintain equity capital worth at least 10% of total bank assets, a much higher requirement than Basel III.
It is not clear what regulatory regime would apply to those not opting out of it if Dodd-Frank were repealed, or if the option element would be retained. Nor is it clear that large, systemically important banks would be better off under his plan than keeping things as they are.
Also, there is the advice of Paul Atkins to be considered. He is a respected former SEC commissioner and a Trump transition team member for financial regulation. Indications are that he would prefer dismantling over repeal, i.e., amending Dodd-Frank to shed it of its most objectionable parts, but keeping the structure that everyone has been working with for the past six years in place.
This, however, could be a huge undertaking. The 2,300-page law has sixteen “titles” covering a wide variety of regulatory activities that have required the writing of 390 new regulations by the several different federal agencies. These alone have so far produced 22,000 additional pages of new rules, and there are still some yet to come. Opening this can of worms up to piecemeal amendment (and hundreds of lobbyists) would be very messy and time consuming at best. Still, it may be the preferred way experienced officials like Adkins would like to proceed with the issue.
Will they listen to Adkins? Maybe not.
There will be pressure from the political side to just dump Dodd-Frank and start over. That would eliminate the hated (by Republicans) Consumer Financial Protection Bureau, and the Financial Stability Oversight Council, living wills, the Volcker Rule, and many other provisions. It would also make uncertain all the rules written by regulatory agencies under the law, but it would certainly shake things up.
A swap deal will certainly be tempting for Trump’s first bold legislative thump.
How would we cope with the re-imposition of Glass-Steagall?
The law would have to be modernised (e.g., do “securities” include government obligations, tradable bank loans and derivatives?) but it could be done. But, only the largest US banks (five or six) would be affected meaningfully. They would have to spin off their investment banking subsidiaries as they did in the 1930s. Most of the banks would object to this strenuously, but at least two of them, Citigroup and Bank of America, longtime too-big-to-manage underperformers trading well below book value, would be better off breaking up. Neither are likely to do so on their own.
If the banks were to spin off their investment banking units, like Lehman Brothers was spun off from American Express in 1994 after a disastrously unsuccessful merger was finally acknowledged as such, the US investment banking industry would suddenly bounce back to five highly-focused competitors: Newly relaunched Salomon Brothers, Merrill Lynch and JP Morgan units would be competing head-to-head again with Goldman Sachs and Morgan Stanley (shorn of their Bank Holding Company status), and Citibank, Chase Manhattan and Bank of America could go back to competing with Wells Fargo for national commercial and retail banking prominence.
The blunt force of politics is not usually the best way for economic policy to be made, but maybe this time it is.
From eFinancial News, Nov. 15, 2016

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