By Morgan Hickman LL.B., Queen’s University Belfast
The Trump campaign called for an overhaul of the regulation of finance in the United States, variously demanding the repeal of the Dodd-Frank act, the reinstatement of the Glass-Steagall act and significant deregulative measures within regulators. The transition from campaign to administration, however, has exposed some of the puff: while there have been some deregulative measures, some of which are substantial, alongside the watering down of the Dodd-Frank act, it does not represent the cataclysmic gear shift the President’s supporters hoped for and his detractors feared. Though there have been criticisms from both sides of the aisle with the Trump administration’s regulatory agenda being both too flimsy and overzealous.
In order to understand the current debate,
a broad analysis of the proposals implemented thus far in the administration
will be outlined, before examining the perspectives of commentators, reflecting
particularly on how they engage in, and contribute to, the general discussion
regarding deregulation of finance in the modern United States of America. It is
anticipated that much of the debate will favour neither stricter regulation nor
substantial deregulation, instead supporting a lateral shift through regulatory
reform. Furthermore, the perception of policies will be coloured by the
rhetoric of the President, leading many potential supporters of the
administration’s agenda to be sceptical of both its efficacy and motives.
Trump’s Regulatory Agenda
facie, the Trump administration could easily be
characterised as pursing a neoliberal agenda: slashing regulation to make way
for exploitation by big business, championing the role of the market in
self-regulation and economic stability. However, rarely are matters so cut and
dried, and it is contended that such a characterisation lacks nuance.
There have been four key areas of financial policy that have had
significant regulatory attention: the application of Dodd-Frank to community
banks, non-bank regulation, capital requirements and proprietary trading. Each
of these have either been subject to deregulative action by Congress or by
regulators under the Trump administration. However, the President has also
engaged in structural reform of the regulatory system through the use of
executive orders, which will be considered as part of his regulatory agenda.
Congress recently passed the Economic
Growth, Regulatory Relief and Consumer Protection Act, which significantly impacts
the regulation of banks holding under USD 10bn of assets (‘community banks’).
This reform provides greater freedom from the Basel III accords and the Volcker
rule, subject to satisfying specific regulatory requirements; some commentators
have hailed this as a boost to the financial sector generally.
Supporters of the relaxation of the
post-crisis regulation expect that this will “push community banks to win back
credit market shares, help US SMEs and foster growth”, Garatti also comments that
should these reforms allow community banks to return to their
pre-crisis/Dodd-Frank share of the loan market (26.7%), it would liberate
approximately USD 500bn of additional credit for US enterprise and consumers. The substantial increase
in credit available would decrease the cost of capital for customers, thus
boosting their capacity for borrowing (and therefore growth) while
simultaneously increasing the profitability of investments made by the banks.
However, both Subran and Garatti also
note that this would expose community banks to significantly higher risk, with
Subran identifying that nearly 500 community banks have CRE assets that
represent over 300% of their capital. Following the recent
reforms, these banks may be able to depart from the Basel III requirement for
capital if their ‘Community Bank Leverage Ratio’ is above the 8–10% threshold. Due to the concentration
of CRE, and agriculture, assets in these banks, they are exposed to
fluctuations in those markets and have a high risk concentration. By relaxing
the regulation, this may lead to increased instability in these core markets.
Ultimately it is clear that community banks were collateral damage
when the Dodd-Frank act was enacted, significantly and negatively effecting
credit availability in ‘Smalltown, USA’, thus unwinding of some of the
Dodd-Frank provisions was inevitable. While the risks associated with this
reform are apparent, the current debate seems to support limited deregulation
in order to stimulate economic growth.
Following the Great Recession, non-bank
credit providing institutions have been the focus of controversy. Voices from
traditional banks contend that overzealous regulation of finance creates the
fertile soil for the growth of so-called ‘shadow banks’. This represents an
orthodox perspective, which argues that, to avoid regulatory arbitrage,
regulations that restrict the abilities of banks to offer (high risk) credit
should be relaxed.
Duca supports this perspective,
contending that empirical analysis demonstrates that, in particular, the
relative burden placed on bank credit versus non-bank credit is a key factor in
the reliance on shadow banking for short-term credit. Similarly, Calomiris
provides two examples that illustrate how the demand for shadow banking is
created by strict regulation on bank credit: high risk credit card customers
and those seeking leveraged loans for private equity deals are no longer
provided for by banks, however are still in need of a line of credit and
therefore naturally turn to non-bank credit providers.
Conversely, Garatti adduces evidence of
a strong correlative relationship between deregulation and shadow banking (R2=0.90), contending that the
deregulation of banks increases the capital generally available to financial
institutions, thus increasing the attractiveness of lucrative opportunities
offered by shadow banks.
While not deregulation sensu stricto, the Trump administration
is utilising its influence within the Financial Stability Oversight Council
(FSOC) to trigger significant change in the practice of regulating non-bank
credit. Specifically, the vote to withdraw the designation of Prudential as a
non-bank systemically important financial institution (SIFI). The SIFI designation is
intended to bring non-bank institutions under the purview of Federal Reserve,
becoming subject to stress tests. While there has been no
move to withdraw the rules or repeal them, as there are no longer any
institutions designated as SIFIs, this represents a de facto deregulative act. This has been deemed a “step in the
right direction for the asset management industry” as SIFI designated
companies find it very challenging to actively invest in the capital markets. However, critics are
concerned that the designation will fall into disuse until another non-bank
displays a systemic issue, which would be too late for it to be used
The actions of the regulators under the Trump administration clearly
represent a relaxing of controls akin to deregulation. While it remains unclear
whether non-bank credit is inherently problematic, most commentators believe
that the risk can be found when a significant financial institution (bank or non-bank)
becomes leveraged in unregulated securities, it could pose a systemic risk. The
FSOC was instituted as a guardrail to prevent non-banks becoming leveraged in
this way without regulatory oversight, thus many critics are concerned that the
US economy may now be exposed to an unhealthy level of risk.
The reduction of capital requirements
throughout the financial industry, another key regulatory project of the Trump
administration, has attracted controversy. The significant reform in this field
has been through decisions made by the regulators who have been installed under
this administration. These proposals will impact significantly the compliance
required by the largest financial institutions. Regulators have been able to
affect this change by modifying the calculation of the leverage ratio, with
trading desks exposed to a higher proportion of low risk instruments able to
enjoy adjusted regulation.
Some commentators have argued that, in
reality, capital requirements do not effectively ensure solvency in periods of
financial instability, with Calomiris citing the example of Citigroup, which
had a capital ratio of 12% (over 3 times the current regulatory requirement) at
the time of its collapse in 2008. He comments wryly that
the requirements imposed by the Dodd-Frank act ensure that “every bank will be
just as safe and sound as Citi was in December 2008.” Similarly, in the context
of the repo market, an investigation by Allahrakha, Cetina and Munyan concludes
that “the leverage ratio as a risk-insensitive capital standard may encourage
firms to increase the risk profile of their remaining activities”, which mirrors the
approach being taken by the Federal Deposit Insurance Corporation and supports,
at least limited, deregulation.
This perspective is not shared by
critics of deregulation, who contend that by taking this step, regulators will
open the door to another financial crisis, with yet others
commenting that this change undermines the core aims of both Basel III and
Some economists are calling for a simple (i.e. fixed) book-value leverage of at
least 15% (nearly 4 times the current regulatory minimum), which they claim
would accelerate the rate of recovery, if not actually decrease the risk of
another financial crisis. However, other economists
believe that a counter-cyclical framework for the regulation of the leverage
ratio is required, as this would moderate
bank lending over the boom cycle and embolden banks on the downswing. This
approach clearly conflicts with the recent FDIC policy and the general
deregulative scheme being undertaken by the Trump administration. Calomiris,
having criticised the principles underpinning the Dodd-Frank act, subsequently
argues that the leverage calculation should be based on the ratio between the
market value of equity and the market value of assets, contending that this
represents the investors’ perceptions of the institutions solvency more
accurately than a ratio relying on book value; this could limit the
ability of institutions to influence their ratio by accounting, furthermore it
could be contended that it makes effective hedging crucial.
It is clear that no commentator is wholly happy with the status quo and that some form of reform
is necessary in the imminent future; the current debate turns on how and in
which direction the regulatory shift should move. It is contended that, though
some academic and political opinion tends towards (limited) deregulation of the
capital requirement – often through a return to risk based requirements – the
majority favours newer, more innovative regulation, with specific calls for
market value leverage and counter-cyclically adjusted capital requirements. In
the round, the current perspective on deregulation is broadly negative in the
context of capital requirements.
The separation of investment banking
activities (principally speculative proprietary trading) from retail banking,
under which deposits are backed by the lender of last resort, is not a scheme
novel in the 21st century. It was first implemented rigorously by
the 1930s Congress in the Glass-Steagall Act. However, the mechanism by
which it is implemented and who is subjected to the restrictions has been
subject to significant debate. There has been significant deregulation
championed by the Trump administration against the current incarnation of the
principle in the ‘Volcker rule’.
The recent Economic Growth, Regulatory
Relief and Consumer Protection Act exempted community banks from the Volker
Rule. This comes at a time where, as identified by Bubb and Kahan, there is a
“rare bipartisan consensus” that “the Volcker rule must be pared back or even
Clearly, it was under this auspice that Congress was able to pass the recent
reforms. However, in the same vein, the FDIC recently voted to “simplify and
tailor the implementing regulations” with a view to “increase efficiency,
reduce excess demands…and allow banking entities to more efficiently provide
services to clients”.
These changes clearly represent a
regulatory perspective that wishes to support business activity, however has
come under significant criticism as a “dangerous plan to carve up the Volcker
rule”, with Gelzinis stating that banks with access to federal deposit
insurance or the Federal Reserve’s discount window should be barred from
proprietary trading. He claims that the changes to the regulation will allow
high-risk activity to take place “under the guise of risk-mitigating hedging”. Other critics have
labelled this an example of regulatory capture, given the recent
appointments by the Trump administration, which enables financial institutions
“to play casino again”.
On the other hand, commentators such
as Blackwell contend that this is a mischaracterisation of the changes: these
represent more of a “streamlining than a dramatic overhaul.” Other critics support a
radical change to the regulatory scheme, arguing that the Volcker rule is
simultaneously over- and under-effective, mischaracterisations of
trading activity by banks (deliberate or otherwise) means that they could still
engage in prohibited trading, while another, cautious
bank, may restrict the desirable, permitted activity in case it is mistaken for
proprietary trading. There is force to this
argument against the ‘define-and-ban’ approach to regulation in general and
against the Volcker rule in particular.
There is significant appetite for a
reform of the Volcker rule, with the general consensus being that it is not fit
for purpose. The lobby divides over the necessity of an outright ban on
universal banking, however in general there is little support for a return to
the Gramm-Leach-Bliley Act era.
The New Glass-Steagall
In terms of proprietary trading, as has
been identified, calls for a strict division between investment and retail
banking has not disappeared since the repeal of the Glass-Steagall act in 1999.
Most notably, the commitment to its return was found in the Trump campaign of
2016. In the context of what is
now the Trump administration, a reinstatement of the Glass-Steagall act would
represent a radical culture shift within the White House and a U-turn on the
key deregulatory and cost control measures the Federal Reserve, FDIC and Office
of the Comptroller of Currency (OCC) have implemented over the first two years
of the administration, outlined above.
In spite of the rhetoric of the Trump
campaign, it does not appear that this administration will oversee the return
of the New Deal regulation; it appears that the new Glass-Steagall may more
closely resemble a two-tier regulatory system, introducing more flexibility for
those not guaranteed by the lender of last resort. However, the perception
of heavy regulation sheds light on the foundations of some of the perspectives
on deregulation in the current debate.
In the round, and unsurprisingly,
there is little desire for a wholesale return to the strict Glass-Steagall
restrictions on the practice of banks. Furthermore, key critics
of the legislation argue that it was not (and feasibly could never have been)
fully enforced by the OCC due to the burden it would place upon the core
business of banks. As has been identified,
attempts to permit only actions required for the core operations of banks are futile,
and have led to the complexities and ineffectiveness of the Volcker rule.
Proposals for the return of the rule,
or some near permutation of it, has found support from politicians and former
policy makers, arguing that the Volcker rule is needlessly complex and
under-ambitious, whereas the simplicity and aggressive approach of the
Glass-Steagall act could resolve the issue. Other critics simply
argue that the US did not experience a crisis like the Great Recession while
the Glass-Steagall act was in force, and that if it wasn’t broken, there was no
need to change it.
In general, while the movement to bring back the Glass-Steagall act
has sustained itself since the repeal nearly 20 year ago, it has usually been a
minority of fringe voices in support. The overwhelming majority
recognise that the financial system of the United States has moved on from the
1930s, and as such the solutions to problems need to move on too.
The Trump administration has implemented
the key elements of regulatory reform either by congressional act or by
appointments to key regulators which have subsequently advanced a regulatory
agenda that mirrors that of the administration. These, alongside other
strategic moves to reform the culture of regulators such as deregulation task
forces and regulatory reform officers, are familiar from the tools used in the
Reagan and Bush (41 and 43) administrations. However, the Trump administration
has also implemented an innovative technique in the form of the “two-for-one” executive
order. Much like other aspects
of the administrations agenda, this move has received heavy criticisms from
across the political and economic spectrum.
Those in support of deregulation have
objected to the mechanisms the administration has implemented on the basis that
it “hardly counts as durable regulatory reform.” This concern is founded
in the fact that an executive order can be overturned by a successive president
without any intervention of Congress. Batkins and Brannon have
given the damning indictment of the attempts at deregulation by the
administration as “piecemeal, subject to intense litigation, and likely to be
unwound by a progressive successor”, challenging the fact that the
administration is not “actually repealing swathes of regulations” as many had
hoped. Other critics have
pragmatically noted that the two-for-one scheme should not be expected to make
major headway as regulators are not expected to pass much regulation under the
Trump administration, thus rending the deregulative obligation moot. Stronger critics have
claimed that the mechanism for implementation was defective: in particular, by
only considering the bare costs the scheme fails to consider the net benefits
of regulations to be repealed, thus leading to a substantially suboptimal
The other key objection to the method
for regulatory reform is in relation to Executive Order 13777, specifically, criticising
the fact that many of the appointees or contributors to the taskforces given
the task of reviewing the efficacy of regulations have (or have had) deep
industry ties, thus increasing the risk of regulatory capture.
Other commentators have been more
generous in contending that this is a pragmatic and sensible policy, even
stating “that if anyone other than Trump had decided to review post-crisis
rulemaking over the past six years, the response would be one of general
How the perspective commentators have taken on the President and the impact
this has on the perspective on the regulation his administration have advanced
will be addressed below.
Overall, there appears to be opposition to the specific manner in
which the Trump administration has implemented structural reforms to
regulation, with specific objections as diverse as the critics. However, in
broad terms, there seems to be general support for reviews and reforms at this
time: while EO 13771 is clearly intended to deregulate finance, value is
recognised in unwinding some of the pro-cyclical reforms made in the aftermath
of the Great Recession.
It is apparent that the contemporary debate
has reacted to each specific regulatory policy and proposal by the Trump
administration differently, however at this point it is helpful to examine the
threads which can be seen featuring throughout the debate. The debate about
administrations agenda can be neatly drawn into two categories: the first being
holistic or systemic criticism of deregulation and the second specific
criticism of the policies in the context of the character of the President. It
is contended that the former provides the core understanding of the general
perception of deregulation, however the latter is required in order to isolate
responses founded in perceptions of the character of the President.
It is necessary to address the latter
category of criticism first, in order to provide a meaningful analysis of the
former, in this context it is contended that there is a general public,
political, and – to a limited extent – academic, attribution of cynical
neoliberalism to the President, thus leading to a presumption that all policies
that concern financial regulation are part of a radical deregulatory agenda.
Though this preconception can largely be attributed to the President’s own
rhetoric both during his presidential campaign and the administration, it
shouldn’t be allowed to influence an objective examination of policy. Upon a
high level analysis of deregulation under the Trump administration, it appears
that the underlying ideology is not exclusively, or even predominantly,
neoliberal. Rather, it appears that the President is promoting a moderate
regulatory position; albeit requiring a level of deregulation. This is
exhibited in the relaxation of regulation where it has been applied too
strictly (e.g. community banks) and where it is uncontroversially ineffective
(e.g. the Volcker rule) in concert with regulators reassessing the regulations
they have on the books when proposing new additions (e.g. EO 13771) and how
they subsequently apply them (e.g. capital requirements). The regulatory
projects thus far represent a pragmatic agenda which should be taken into
account in future examinations of proposals and policies.
In terms of systemic criticism of
deregulation, it is suggested that, as anticipated, there is little appetite
for radical changes or extreme ideological positions. The consequences of the
Great Recession remain a recent reminder of the risks associated with finance
under liberalised regulation, as such most commentators advocate for innovative
regulations with a focus on risk-control, in most circumstances regulatory
reform is necessary to achieve this aim. This appears to reflect a consensus
against procyclical regulation, in contradiction with the calls from politicians
and the industry to significantly relax regulation in light of the recovery
from the last crisis. The contemporary debate, particularly in the context of
capital requirements, calls for a countercyclical scheme; while this will
inhibit economic growth in the short term, it will significantly reduce the
risk of return to a ‘boom-and-bust’ economy.
In totality, it is contended that the
Trump administration’s clearly deregulatory agenda is more moderate than was
anticipated, however still conforms to the expectations of a procyclical model
of financial regulation. The contemporary debate does not show particular
sympathy for a substantial deregulatory agenda and appears to broadly tolerate
the administration’s proposals. However, in the round, the majority of the
voices examined in the current debate support a wide-ranging scheme of
regulatory reform to introduce countercyclical measures to minimise the
exposure of the United States economy to systemic risk. The lack of political
will to enact such reforms at this time, however, unfortunately appears to
leave the hopes and innovative suggestions of the academy at the side-lines for
now: at least until the next financial crisis.
Table of Statutes
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§§ 221–522; Pub L No 73-66, 48 Stat 162 (1933)
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Economic Growth, Regulatory
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Table of Official Documentation/Quasi-Legislation
Executive Order 13771, 82
Fed Reg 9339
Executive Order 13777
(2017) 82 Fed Reg 12285
Proposed Revisions to
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in, and Relationships With, Hedge Funds and Private Equity Funds, 83 Fed Reg
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