What Lies Beneath

If one were to look only at the surface level of activity that has taken place since the Trump Administration has assumed office, there is a lot of activity, controversy and coverage of events large and small. What would seemingly be missing is any clear path to a program of movement on the policy front.But is what on the surface indicative of no policy or program direction in financial services? Unlike other industries, there were significant pieces of draft legislation in financial services which the new administration could work with on day one after taking office. A deeper dive into the Administration’s actions taken over the last several weeks indicates movement, if not a defined policy on a legislative or regulatory program. Any one of the current discussions is enough to have a significant impact on banks and brokerages, but taken together, if adopted will mean a restructuring of financial serves not seen in decades.

Community Banks

On May 1, the President met with community banking vowing a rollback on the regulatory burdens of Dodd-Frank. Among other proposals, the idea of a two-tier regulatory system – one for large banks and another for small banks was floated. Citadel’s CEO Ken Griffin supports such a move, taking the view that banking is neither innovative nor competitive enough. Additionally, the “too big to fail” bailouts for banks will go away. While provisions of Dodd-Frank will be modified, a wholesale repeal of the law is unlikely. What is more likely is a reduction or dimming of the reach and scale of Dodd Frank. Senate Majority Leader Mitch McConnell envisions movement in regulation by the Administration in its review of Dodd-Frank implementation rather than a legislative overhaul. Yet, it turns out the difficulty for Democrats is not the two tier bank idea, but the proposed elimination of the Volker Rule and the Consumer Financial Protection Bureau[1]

The “too big to fail approach” is also part of a second recent development. The revised version of the Financial Choice Act[2], which eliminates large parts of Dodd-Frank, was voted on and passed through the House Financial Services Committee on May 4th. It is expected to be voted on by the full House of Representatives on May 21. Should it pass a full House vote, it will then be up to the Senate Banking to decide if it wants to pick up the bill for further advancement. As with other House initiatives, as noted above, should Senator Crapo, Chairman of the Banking Committee take it up, there will most likely be significant changes in the Senate.[3] This is borne out by industry opposition already weighing in on reform, with the CII and 53 institutions writing to oppose perceived anti-shareholder provisions.[4]

Capital Formation

That said, there are ideas in the area of capital formation that do have bi-partisan support and therefore could possibly advance to a Senate companion bill. These include: exchange parity for IPOs, an expansion on the existing “testing the waters” privileges afforded to only those companies who are considered “emerging growth” and more.

The Financial Choice Act is viewed by those who support it as not a means of dismantling financial services regulation, but shoring it up. There are discussions underway for a reinstatement of some type of The Glass-Steagal Act, which also seems to have bipartisan support. The Financial Choice Act itself highlights systemic risk, consumer protection and holding Wall Street accountable and directs the SEC to refocus its enforcement responsibilities. And regulation is not easily undone – the same process of Concept Release and Comment Letter and Commission votes apply in eliminating regulation as in passing regulation in the first place. Significantly, if regulation is not enforced firms are not exempt from remaining in compliance.
A path towards a great unwinding of regulation is not in sight. If anything, the combination of initiatives currently under consideration could constitute a market structure reform that, like many government programs of the past, was unintended but happened nonetheless.

Never look at the surface alone…focus also on what lies beneath.

[1] https://www.bloomberg.com/news/articles/2017-05-16/mcconnell-says-he-s-pessimistic-congress-will-revamp-dodd-frank

[2] The Choice Act Executive Summary:

Click to access financial_choice_act-_executive_summary.pdf

[3] https://www.investmentnews.com/article/20170517/FREE/170519925/crapo-calls-for-bipartisan-common-sense-reform-of-financial

[4] https://www.cii.org/may172017_choice_act

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