Pass the sal volatile- investors get the vapours…

Like periodic crises, catastrophes and taxes, regulation is reality for all banks, insurance and re-insurance companies. Even so-called NBFIs rarely escape entirely; and while regulation is normally “packaged” in the form of an impersonal bureaucratic and administrative construct, the underlying driver is almost invariably political. And until the world is run by algorithms, regulators and politicians are also very human, with all that entails.

So, in the wake of the election of Donald Trump as the 45th President of the United States; the resulting ramping up in the public marker values of many banks; and the attendant frenzy of speculation about what a Trump Administration, in “alliance” with a Republican-controlled Congress might do, we thought it would be worthwhile to make a few points.

Firstly, while there is much comment about Dodd-Frank being repealed, it is, not surprisingly, as yet unclear what the President-elect’s legislative and policy priorities are in terms of timing.

Secondly, it is easy to make sweeping statements about the “repeal” of Dodd-Frank; but that assumes that there is agreement amongst all the parties involved. There is not. Wholesale and outright repeal of Dodd-Frank, would, in any case, be a complex and difficult exercise, not only because it would, almost certainly, face staunch opposition from Senate Democrats using the filibuster rule, but also because it is an immensely complex and inter-locking construct, to which banks and the others affected have gradually adapted. Simply de-constructing and removing all its components would be far easier said than done.

Thirdly, the President-Elect should not be assumed to be a friend of banks without condition. He has advocated the return of the Glass-Steagall era separation of commercial and investment banking. If that occurs, commercial banks will still be eager to lend money and provide transactional services; while it is likely that, as a quid pro quo, for some loosening on constraints, capital requirements will be increased for investment banks.

Fourthly, many of the rules that are applied to US banks stem from directives made by the Federal Reserve/OCC/FDIC. While political pressure might be brought to bear and personnel changes made with appointments to vacant positions or as mandates expire, it is likely that institutionally they would jealously try to safeguard their independence.

Fifthly, it is one thing to state blithely that the repeal of Dodd-Frank and other relevant legislation is a “good thing”; it is entirely another to assume that weakening the capital requirements and other constraints placed on banks post-crisis would be seen as positive in terms of protecting the taxpaying public against the effects of a future financial crisis. There would be significant opposition from many quarters.

Sixthly, so far as US-based (re)insurance companies are concerned, while there may be pressure to remove the Fed or Federal Government from oversight of the largest companies, most of the applicable constraints stem from state-level regulation coordinated by the NAIC. There seems little likelihood of any material change to that arrangement.

And lastly, perhaps the most consequential potential change in economic terms would be a long-mooted attempt by Republicans to remove the GSEs from their dominant role in the residential mortgage market. Perhaps, in this case, conservatism will finally triumph over socialism.

So, in reality, regulated FIs are going to have to continue to try to read the political and regulatory tea leaves, and be prepared for inconsistent and potentially contradictory statements and actions from the incoming Administration and Congress. Nothing changes in that regard!

From Awbury’s point of view, long experience has taught us, on the one hand, to expect volatility, policy swings and unintended consequences; and, on the other, that substantive change is harder than forecast- all of which tends to create new opportunities for those with a flexible and adaptive business model.

The Awbury Team

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