Foreign banks could lose out if U.S. President Donald Trump succeeds in doing “a big number” on regulations governing the country’s financial services industry. But should he make good on another electoral promise – to boost the U.S. economy and add jobs – then both foreign and domestic banks could be big winners, a Rotman School of Management seminar was told.
Mark Hughes, Group Chief Risk Officer with RBC, told the Toronto seminar that there has been a trend towards balkanization of financial services in Europe, a development that may increase now with the United States.
“I would postulate that we are in a very fragile time and hopefully we will not truly end up with barriers...because for most banks the United States is the largest financial market in the world,” said Hughes. “It is very important for the financial community to work together and the United States has to be part of that.”
The early February seminar was co-incidentally held just a day before Trump signed an executive order aimed at rolling back regulations on Dodd-Frank, the U.S. legislation passed in 2010 to safeguard against another financial meltdown in the United States. The order lays out unspecified “core principles” for regulations to enhance the competitiveness of U.S. companies.
Tiff Macklem, dean of the Rotman School of Management and a former senior deputy governor of the Bank of Canada, said it was hard to imagine a more complex regulatory system for financial services than is currently in the U.S.
“There is a good case to be made that the pendulum of financial regulation has gone too far,” said Macklem. “There’s no question that we were dramatically under-regulated before the crisis but it may have swung too far towards overly burdensome and excessive regulation. So it’s not unreasonable to think that we could benefit from the pendulum coming back more towards the middle.”
While Dodd-Frank did much to strengthen regulatory requirements, it failed to simplify the system and make it more efficient, said Macklem. For example, the U.S. has four different regulators for deposit-taking institutions, two conduct regulators and different regulations for each state when it comes to insurance.
By and large, he said, the stricter regulations put in place in the U.S. and elsewhere around the world, have been positive, with global banks raising “hundreds of billions of dollars” of additional capital, leverage is lower and there are considerably stronger liquidity requirements.
The question now though is whether Trump will peel back these reforms. “Is the pendulum going to swing back in the middle or is it going to swing too far and provide the seeds for the next crisis?” asked Macklem.
Hughes agreed that throwing out all of Dodd-Frank would not be in anyone’s best interests.
He said he believes Trump is really looking to create more jobs and improve the economy – and the banks can help with that. “I think what he thinks of the banks is how do they lend more and how does he get the community banks and the regional banks to lend more. I don’t think he really thinks about cutting back too much on the large banks.”
Hughes said he expects there will be a trade off with the Trump administration encouraging financial institutions to lend more and in exchange Trump would cut regulations.
Trump’s “America First” policy may be a bit worrisome to all foreign companies, not just banks, said John Hull, Maple Financial Group Chair in derivatives and risk management at Rotman.
“I think it’s really important for Canadian banks operating in the U.S. to tout how many employees they have and just how important they are to the U.S. economy. That seems to be an important point.”
Canada is already a major player in the U.S. banking system, employing thousands of Americans, he said.
Sheryl Kennedy, CEO of Promontory Financial Group Canada ULC and a former deputy governor of the Bank of Canada, said there is much uncertainty as to Trump’s next steps, a situation that could cause volatility going forward.
She said virtually all Canadian business leaders, not just those with financial institutions, are concerned about what’s going on in the United States and are keeping their heads down, refusing to make any big investment decisions until some of the uncertainty disappears.
While she too she was worried about the potential for balkanization, she also said she was hopeful that there will be economic growth, which has traditionally meant opportunities for financial services.
In addition to the executive order that is likely to see a paring down of Dodd-Frank, Trump also signed a memorandum that could reverse the U.S. fiduciary rule, set to take effect in April. That rule requires brokers to act in the best interests of their client when providing retirement advice.