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Clinton vs Trump on: Financial regulations

Americas / 17-10-16 / by
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In this series, GTR compares the two US presidential hopefuls’ campaign promises on trade-related topics, and evaluates how likely these promises are to be fulfilled.

Judging by all the headlines about the Wells Fargo case, in which employees created ghost accounts under the names of clients that were not notified, financial regulations are once again in the spotlight. It is an opportune time to look at how the two presidential candidates are promising to reform the sector, and, as in many other areas, Hillary Clinton and Donald Trump’s views are polar opposites.

 

Trump: War on Dodd-Frank

Although there is no formal documentation on Donald Trump’s plans for the financial sector, he has made a few comments on the topic, most of which were very critical of the Dodd-Frank regulations introduced after the financial crisis.

“His claim is that it’s paralysing the ability of financial institutions to do their job and specifically their ability to lend to businesses,” Guido Tamburini, managing partner of financial services consultancy CAPCO’s Northeast US practice, tells GTR.

Anyone working in the world of finance believes that for most financiers, regulation is seen as a burden, so in that sense, Trump’s desire to repeal Dodd-Frank could be seen as a positive thing. But the reality is very different.

First, it’s unlikely a President Trump would be able to fulfil this particular campaign promise. “No regulation in US history that affects the financial services industry has ever been repealed. They have only been supplanted by a new regulatory framework. That’s for a very good reason: you wouldn’t want to eliminate a regulatory framework and leave nothing in its place, so the likelihood of doing that in a simple sweeping way is extremely low,” Tamburini explains.

He believes Trump is more likely to try to politically weaken the bodies in charge of monitoring breaches and fining organisations for breaches, than to undertake the gigantic task of changing the regulatory framework.

While the end result of a less regulated environment would allow financial institutions to operate more freely, the journey of getting there through sweeping change would probably be as painful as it has been for the past six years to comply with Dodd-Frank. Guido Tamburini, CAPCO

But more importantly, the one thing financial institutions hate more than regulation is uncertainty, and any effort to overhaul the legal framework governing lending would result in turbulence. “There are concerns about the impact that the change proposed by Trump would have on other aspects of what goes on,” one US banker tells GTR, speaking on conditions of anonymity.

“There is the end state and there is the getting there,” adds Tamburini. “While the end result of a less regulated environment would allow financial institutions to operate more freely, the journey of getting there through sweeping change would probably be as painful as it has been for the past six years to comply with Dodd-Frank and the affiliated regulations, and the FIs understand that. My sense from conversations is that whilst they would prefer for specific parts of regulations to be relaxed, they would not welcome having to go through a very tense political season that would probably be part of a very complex and turbulent macroeconomic scenario.”

 

Clinton: Tightening the grip

Unlike her opponent, Hillary Clinton has laid out her plans for financial reform on her official platform. They include:

  • Imposing a risk fee on the largest financial institutions
  • Closing loopholes that let banks make risky investments with taxpayer money by strengthening the Volcker Rule
  • Holding senior bankers accountable when a large bank suffers major losses
  • Giving regulators more authority to force organisations that are “too big to fail” to reorganise, downsize, or break apart.
  • Increasing oversight of the shadow banking system
  • Imposing a tax on high-frequency trading

Conversations in the market reveal that the business and financial services community would prefer this option, even if it means a tightening of existing regulations.

“People in the financial services sector are rooting for Clinton as president as it would be the status quo; they would know the beast they’re dealing with. No matter the legislation, institutions can find a way around it. The Wells Fargo scandal happened despite Dodd-Frank. At least having the regulations in place, there’s a level of control,” the unnamed banker explains, adding that what is truly needed to put an end to fraud and malpractice is a cultural change through which good behaviour is rewarded and bad behaviour is punished.

Considering that Wells Fargo’s former CEO John Stumpf was able to simply retire with a hefty bonus after admitting he was aware of the misconduct taking place in his bank, while thousands of his employees were being fired, the question of senior executive accountability is hotter than ever. And here too, Clinton has a plan, specifically to “hold both corporations and individuals on Wall Street accountable”. Her promises include prosecuting individuals when they break the law, enhancing whistleblower rewards, holding executives accountable for their employees’ misconduct and “making sure that corporations can’t treat penalties for breaking the law as merely a cost of doing business”.

People in the financial services sector are rooting for Clinton as president as it would be the status quo; they would know the beast they’re dealing with. Unnamed banker

But many are sceptical about her intention to fulfil this part of her programme. “Holding senior executives accountable is all talk to sway votes. If she intended to do that she would have done so before. She’s never been on that platform but it is what people want to hear,” the banker comments.

Tamburini explains that some people in Democratic circles are advocates of more radical overhauls, namely senators Bernie Sanders and Elizabeth Warren – a credible candidate for treasury secretary under a Clinton President – but believes the likelihood of separating commercial and investment banking, as proposed by these individuals, remains low.

“That would be an extreme act. The downstream effect of that on the market would far outweigh any other form of turbulence,” he adds.

 

Read previous articles in the series:

Clinton vs Trump on: China

Clinton vs Trump on: Free trade

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