Shooting with Live Ammo:
The 2017 Financial-Policy Agenda
For the first time in at least a decade, federal policy-makers in 2017 will not (we hope) have to wrestle with a systemic crisis or implement and then defend their response to one. They will instead turn to the new shape of U.S. financial markets and make changes to ratify the reforms they like, fix the ones they don’t, and turn to new questions about market competitiveness and stability created by the old answers. Financial institutions with their fate hanging in this balance now must know the answers they advocate to these questions to ensure that their voice is heard in 2017’s game-changing debate.
What are the new, top-priority questions?
- What Could Go Wrong? Will there be more flash crashes that challenge market liquidity or broader systems failures that lead regulators to demand new protections? What risks will the new Treasury Department highlight as its top priority and how will it want them handled?
- Who Owns Whom? Activist investors will be empowered in and by the new political and policy line-up, reinvigorating efforts to break up some big bank. Nothing in law now bars new charters for private-equity companies or others who think an insured depository would be nice, with mergers between banks and insurance companies also likely to advance. What is the new U.S. antitrust policy for financial-services companies? How will “financial stability” be defined if the FRB has a role in approving M&A? Will community-service standards remain daunting and how critical will past compliance misdeeds prove?
- Who Does What? Do banks and securities firms grow closer or get pushed still farther apart by new Glass-Steagall requirements or Volcker liberalization? What is the right structure for an integrated, cross-border financial-services company? Does the “Hotel California” rule disappear? How is fintech governed? How do investors realize the return they demand from complex companies if new inter-affiliate restrictions come into force as protectionism grows?
- What Settles Where? Congress is looking at ending the mandate for central clearing and systemic regulation governing CCPs and the rest of the market infrastructure that has grown hugely since 2008. Is there a chance for a new burst of OTC derivatives? How much margin and collateral will be demanded from whom and how? Will new TBTF institutions arise?
- How Much Capital Is Ponied Up by Whom? Congress is looking at a total rewrite of the U.S. capital rules for big banks. Will there be a 10% leverage requirement. If so, does it come with a regulatory rollback or do some of the old rules remain, especially for large BHCs? Will the U.S. proceed to standardize its own capital rules no matter what happens to Basel IV?
- How are Mortgages Financed? Will there be GSE reform now and, if so, will it stop with Fannie and Freddie or sweep in Ginnie Mae and the Federal Home Loan Banks? How private could U.S. residential-mortgage finance become? Could anyone take the GSEs’ place for credit enhancement and liquidity?
- Who Fails How? The largest U.S. banks believe that too big to fail has been terminated by TLAC and tough living wills, but Republicans want to roll back Dodd-Frank’s resolution provisions and rewrite the Bankruptcy Code. Others still want structural changes to the largest U.S. banks and even to foreign financial companies doing business here. As other nations return to a more TBTF structure, what happens to cross-border finance? Who is at risk how if a large bank goes bust?
- Does the Fed Take Heavy Fire? Will Congress ban IOER? What about other actions limiting Fed policy options and its regulatory role? Will the U.S. still have a lender of last resort?
We’ve got some answers to these questions for you. To obtain them and understand the analytical resources on which they are based, reply by return e-mail or call 202-589-0880 and ask for Arezou Rafikian.