With two weeks of relative calm during the holidays, I’ve thought hard about what 2017 means for the financial-services industry. Shifting through all the forecasts we’ve done for individual clients and on specific issues, I have one over-arching conclusion: the days of advocacy through complex comment letters and Dodd-Frank nibbles is over. Regardless of what one thinks about the election’s results, for financial services they mean that the rulebook now is a blank slate. Congress and the Trump Administration are asking very fundamental questions about the post-crisis structure of U.S. financial regulation. Companies that do not know the answers they want will get these questions answered by others at their expense.
In a new post, FedFin has collated the major questions folks are asking us and those already being voiced as the new team takes hold. The scope of these questions includes fundamental franchise-value challenges such as the ability of emboldened activist investors finally meaningfully to take on a very big financial company, especially any bank served up to it by still more stringent regulatory requirements. There are also questions that, depending on who gets them answered how, could free some companies now chained to their GSIB charters to go back to the investment-banking business they know and love without having to abandon a banking charter somewhere in the shop. Foreign financial institutions, especially large banks and firms from certain countries, also face a new era of protectionism and ring-fencing that will require careful advance planning, especially for those still hoping for some M&A action. Asset-management companies face new challenges because an end to threats of SEC rules comes with a new determination by the FRB to step in, a challenge also faced by the largest insurance companies if FSOC’s role is as neutered as we expect it to be.
There are also critical structural questions that will affect all financial-services companies regardless of charter or domicile – for example, the extent to which the Federal Reserve will now be able to execute monetary policy, pay IOER and use the RRP, and act as a lender of last resort. Questions on the future of U.S. resolution policy also need answers ASAP. As we noted in a new report yesterday, even Democrats now are questioning both bankruptcy reform and OLA. Will the solution be to let large financial chips fall where they may?
Another critical issue from both a market structure and competitiveness perspective is “who settles what where.” Republicans are poised to end systemic regulation for CCPs and similar trading venues and even resurrect the ability of traders to settle positions over the counter. How embedded is the new central-clearing mechanism now and who will get what if growing efforts to ensure resilience and resolvability are blocked in the U.S.? What happens to all the new uncleared margin rules, as well as to growing concentration in the government-settlement arena?
Other 2017 questions may seem more technical but are at least as strategic. One we noted in our questionnaire addresses the shape of the U.S. capital rules post Basel IV break-down. To be sure, the Basel Committee could pull Basel IV back from the brink, but if it does you can be sure the U.S. will not be pleased with it. The combination of an increasingly dysfunctional global accord and growing U.S. conviction against advanced approaches could well lead to a Basel IV rule here that rests largely on standardized weightings and a tough leverage ratio. Companies whose ROE and product mix rest in the hands of these capital rules should think hard and very fast about what a standardized approach for large, complex banks should look like and how a balance can be struck with leverage.
Now that we’ve laid out some the questions, what about the answers? Successful ones will match astute political judgments about what is doable with convincing analytics about what is worth doing. This is harder to do than write a comment on a fully-formed proposal, but it’s also a lot more effective in shaping a financial system that not only makes markets safer, but also reflects a sensible balance of policy objectives and market realities.