Moments after Donald Trump was sworn in as President of the Unites States, the White House website highlighted regulatory rollback as a top priority of the new administration.
But the commentary about a cut in regulation in the US has largely overlooked the important fact that he is talking about slashing red tape rather than nixing rules designed to make banks safer.
According to Kevin Nixon, Global & Asia-Pacific Lead, Deloitte Centre for Regulatory Strategy, while President Trump has talked about freeing up the economy to get businesses moving it is unlikely there will be much change when it comes to prudential regulation and the soundness of the banking system.
“How many forms do you have to fill out, how many authorities do you need approval from – it is the red tape that Trump perceives as choking US business," he said. “That said there are a couple of rules that the Republicans have long wanted to scrap."
Here the financial advisor is referring to Dodd-Frank’s Title II, which legislates too-big-to-fail bail-out procedures for banks and the controversial Volcker rule, which bans propriety trading.
The administration is concerned that a rule meant to block banks from speculating with their customers' money is hurting the financial system by drying up liquidity, By unwinding Title II, if a major US bank fails it will be forced to file for bankruptcy.
Tweak rather than rewrite
Outside these two rules, Nixon noted that the Trump Administration’s strategy looked to be one of ‘repeal and replace’ legislation- to tweak rather than rewrite.
To him, by far the most interesting ‘replace’ effort will be if Trump pushes ahead with the Financial Choice Act – a piece of draft legislation introduced last October by the Financial Services Committee. Among other things, the bill would repeal the Volcker rule and also weaken the Consumer Financial Protection Act.
At the heart of Choice is an 'off-ramp' from Dodd-Frank’s suffocating regulatory complexity - a provision that exempts lenders from the highly restrictive and obtrusive Dodd-Frank if they agree to higher capital requirements.
“The Choice Act basically says that stress testing and recovery resolution planning are very onerous and costly," said Nixon So, banks can choose to either ignore all banking regulation as long as they hold the equivalent of 10 per cent of their assets in capital.
“A 10 per cent leverage ratio is close to double the amount of capital US banks are currently required to hold since the big banks typically hold around 6 per cent of their assets in capital – not a choice you want to make."
By continuing to encourage banks to hold lots of capital, it doesn’t look as though the US is planning to switch direction when it comes to key reforms for Basel Committee on Banking Supervision.
Banks’ internal modelling has led to fears they could “game” the system by reducing risk weighting and thus their capital requirements. The US, together with Australia, has long been skeptical of banks’ models, while Europe and Japan insist the models provide accurate assessments of some assets.
Negotiators recently walked out of what should have been the final Basel meeting on capital levels, underscoring the US commitment to the process.