Word on the web: US regulation review

Donald Trump has signed an executive order pushing for the deregulation of the US financial services industry. It’s good news for US banking chiefs, but what implications will this have on overseas markets? 

US President Donald Trump has delivered yet another dose of reform, this time aimed at relaxing financial regulations. On 3 February, Trump signed an executive order to review the Dodd-Frank Wall Street Reform and Consumer Protection Act, brought in by the Obama Administration in 2010 in an attempt to decrease a number of risks in the US financial system following the 2008 crisis. 

In the president’s view – one that is shared by many US banking heads – these rules are too stifling. “I have so many people, friends of mine that have nice businesses, that can’t borrow money, they just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd-Frank,” he said during a speech to attendees at his recently instated Strategy and Policy Forum. And the new administration is not planning a soft shot at reform. “We're going to attack all aspects of Dodd-Frank,” Gary Cohn, director of the White House National Economic Council and former Goldman Sachs president, told Bloomberg Television. “Banks have been forced to hoard capital.”

This is good news for US shareholders, who could receive a “windfall” of capital, says Investopedia’s Mark Kolakowski. Banks have continued to hold excess capital – approximately $120bn is held by the 18 largest US banks, according to Morgan Stanley – chiefly to ensure that they pass annual Federal Reserve stress tests. “After years of solidifying their balance sheets, big banks find themselves with significantly more capital than regulators require, and are poised to return the excess to investors through dividend increases and share repurchases,” Kolakowski notes, citing the Wall Street Journal.

Furthermore, returning capital through “share buybacks” would result in a decrease of the share base, leading to an improvement in earnings per share (EPS) and a potential increase in share prices, “which already have surged since Trump's election”, he says.

Investopedia article
The European struggle Good news for the Americans, but in the true spirit of Trump’s ‘America first’ campaign, allowing US banks to put aside less capital would “tilt the playing field” against European firms – many of whom are trying to improve their balance sheets and work on post-financial crisis business models that deliver adequate return on equity to shareholders – according to Bloomberg’s Mark Gilbert.

European Central Bank (ECB) President Mario Draghi voiced these concerns at the European Parliament's recent Committee on Economic Affairs in Brussels. “The last thing we need at this point in time is the relaxation of regulation. The idea of repeating the conditions that were in place before the crisis is something that is very worrisome.”
The amount of excess capital held by the 18 largest US banks

According to Gilbert, European banks have seen a reduction in involvement in international capital markets, allowing US competitors to gain ground. Looking at global loans, among the top ten firms in 2016, US banking organisations saw a combined market share of 32%, while the share of European companies was 13%. Similarly, in international bond underwriting, US firms took 31% of last year’s sales, compared to 25% from European companies, and in global equity offerings, US organisations hold almost 38% of the market, compared to only 17% held by European firms. In light of Trump's dismantling of Dodd-Frank, European financial organisations must ensure they do not surrender too much market share to the US, says Gilbert.

Bloomberg article
Regulation and the City And what are the implications for the City of London? In an article for the Evening Standard, Anthony Hilton questions how the City will uphold a standard of regulation comparable to what exists within the EU – a requirement if it is to be allowed easy access to EU markets – while at the same time maintaining its competitive business status against the US, if cities such as New York can offer “similar skills and infrastructure but without the restrictions”. 

While less regulation is intended to entice more business to the US, a further regulatory initiative under way in London has the potential to make the City “a much more attractive place to do business”, says Hilton. And it all stems from the question of ethics. Hilton references a letter to the Financial Times, written many years ago, by Scott Dobbie FCSI(Hon), former chairman of the CISI and senior adviser at Deutsche Bank, who had identified a major issue following the Big Bang in 1986. Scott said that he was given clear guidance at the start of his career “as to who should benefit in any transaction. The client came first, the firm second and he, the employee, last. The problem with the modern City is that the order has been reversed, he added. These days, the client’s interests come last”.

Scandals and indiscretions led the Treasury, the Bank of England and the FCA to conduct the Fair and Effective Markets Review, which ultimately triggered the inception of the FICC Markets Standards Board (FMSB) – a voluntary attempt by the City to clean up its act. While many may be cynical about these promises to reform, Hilton believes this time could be different. “First, there is genuine commitment from the top. Second, it is not just bankers at the table; it is everybody,” he says. 

While regulation is being loosened in the US, it could well be that voluntary standards – previously overlooked in finance, but which have been notably effective in other business areas, Hilton notes – are the new draw for people to do business in the City. The industry is keen to uphold this ‘cleaner’ method of operating, certainly within the UK and European spheres, so deregulation, it seems, might not trump all.

Evening Standard article
Seen a blog, news story or discussion online that you think might interest CISI members? Email rosalie.starling@wardour.co.uk.
Published: 10 Feb 2017
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