TORONTO/NEW YORK (Thomson Reuters Regulatory Intelligence) - The United States may well pull back from a leadership role in international financial regulation and is unlikely to adapt the domestic regulatory structure to fast-paced industry innovation, a former policymaker in the Obama administration and Congress told bankers.
Aaron Klein, who served as the Senate Banking Committee’s chief economist as it wrote the Dodd-Frank overhaul and as a senior Treasury Department policy official, also told the bankers that there was no prospect of a major regulatory rewrite passing Congress under President Donald Trump. But changes to non-core provisions of Dodd-Frank, such as the “Volcker Rule” barring proprietary trading by banks, may be possible.
“There is going to be a pullback of the U.S. as a leader in global finance,” Klein said. With concurrent weaker domestic oversight by regulators, industry will have less regulatory restraint. “The speed limit is going to go up,” he said.
Klein, who is now an economic policy director at the Brookings Institution think tank, spoke in Toronto at the annual SWIFT International Banking Operations Seminar, or Sibos, a major industry conference. Trump’s impact on financial regulation, the looming British withdrawal from the European Union and the EU’s continued implementation of its regulatory agenda were all prominent topics.
The U.S. Treasury Department would be among the first Trump administration agencies to withdraw from the international leadership role it has played through institutions such as the Financial Stability Board, set up by the Group of 20 after the 2008 financial crisis, Klein said.
He said the department was directly responsible for executing Trump’s economic agenda, whereas a more independent regulator such as the Federal Reserve would be slower to give up its leadership in international institutions such as the Basel Committee on Banking Supervision.
“The leading role is incompatible with the concept of America First,” he said, referring to a central element of Trump’s political platform. “We’re going to start withdrawing, first as a leader, then to some degree as a participant.”
An early example was last month’s decision by U.S. Financial Stability Oversight Council, chaired by the Treasury Department, to end the systemically-important status of multinational insurer AIG. The designation process, with accompanying stricter regulation, was a prominent feature of the international response to the financial crisis.
It is unclear how other countries will respond to the move, but the message is clear, he said: “The U.S. is acting in a unilateral way.”
Trump came to office pledging to “dismantle” the 2010 Dodd-Frank regulatory overhaul, in service of a broader agenda of boosting economic growth. Congress was unlikely to deliver anything like a complete overhaul, Klein said. “There will not be a new financial regulation bill with a bill-signing for this president.”
There is no longer the sense of crisis typically needed to pass major financial legislation. Furthermore, Dodd-Frank is popular with a consistent majority of the U.S. public. Finally, he said, advocates of reining in the financial industry exist in both parties, such as Senator John McCain on the Republican side and Senator Elizabeth Warren among Democrats, making it hard to push through party-line deregulation.
Although the Financial CHOICE Act which passed the Republican-controlled House would make big changes in Dodd-Frank, the Senate was unlikely to act on it, Klein said.
Rather, smaller, non-core parts of Dodd-Frank, such as the “Durbin Amendment” limiting credit card fees charged to merchants, or the Volcker Rule barring proprietary trading by banks, may be targeted as part of larger, unrelated legislation that must pass Congress.
Trump’s deregulation will come from the regulators he appoints, instead of from Congress.
“The vast majority of Dodd-Frank is an expansion of regulatory authority,” Klein said. “What’s going to first happen is the new Trump regulators are going to ignore it. There’s not going to be any new regulation. Over time this will weaken the existing structure of regulation,” he said. “Innovation will create new products that don’t naturally fit the existing regulatory landscape.”
Another likely feature of Trump’s regulatory leaders is they will represent not only traditional Republicans but also advocates of more radical change.
“Those folks are going to come in and they are going to do things differently,” he said, “This is going to produce regulatory divergence.”
These differences may lead to debate about issues such as the separation of banking and commerce, or the regulatory independence traditionally held by the Federal Reserve. “I think that independence is going to come under attack … It’s antithetical to the core concept of Trump, which is a central strong executive.”
The direction of financial regulation under Trump was predictable when he took office in January and broad expectations have not significantly changed, Klein said. But so far the deregulation agenda has been notably slow and imprecise. Trump has lagged in filling out his regulatory leadership ranks, leaving many of the questions about future policy unanswered. “Even I was surprised at the delay in naming people,” Klein said.
(Randall Mikkelsen is North American managing editor, Regulatory Intelligence, for Thomson Reuters.)
This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Oct. 17. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters