A suggestion for bankers trying to read Trump Administration tealeaves: drink more coffee. You will need to be wide awake and alert for game-changing regulatory changes that may—or may not—be on the horizon.
On the campaign trail, and frequently during Donald Trump’s young presidency, he has focused on relieving financial regulation. The Volcker rule, a Dodd-Frank ban on proprietary trading in federal insured banks, is atop the hit list. During the May 8 meeting of the Financial Stability Oversight Council, the Treasury secretary told the heads of regulatory agencies that its restrictions should, at the very least, be loosened.
Other promises from the White House and Republican-majority Congress have singled out stress tests, the imbalance between small bank and big bank regulation, and Dodd-Frank’s Orderly Liquidation Authority, a process that may or may not protect taxpayers from bailing too-big-to-fail banks (depending on who you ask, and whether a “D” or “R” is tagged to their name).
Throughout all the administration’s talk of regulatory rollbacks, however, there has been a befuddling curveball. The president and his economic team keep resuscitation arguments to reinstate the Glass-Steagall Act and the Depression era law’s variation on a theme of the modern Volcker rule.
How, observers must be asking, can Republicans be falling in line behind a pet cause of Sen. Elizabeth Warren (D-Mass.)? How in the world could both the Democratic and Republican party platforms be aligned behind modernizing a rule the latter party once lobbied to kill?
Warren herself tried to better understand the machinations of her strange bedfellows when Mnuchin appeared, for the first time since his confirmation, before the Senate Banking Committee on May 18. The answer: Sometimes a Glass-Steagall Act isn’t really THE Glass Steagall Act.
The original Glass-Steagall legislation was introduced in response to the financial crash of 1929 and separated depository banks from investment banks. The idea was to divide the risky activities of investment banks from the core depository functions that consumers rely upon every day.
Starting in the 1980s, regulators at the Federal Reserve and the Office of the Comptroller of the Currency reinterpreted longstanding legal terms in ways that slowly broke down the wall between investment and depository banking and weakened Glass-Steagall. In 1999, after 12 attempts at repeal, Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Steagall.
In April, Senators Elizabeth Warren (D-Mass.), John McCain (R-Ariz.), Maria Cantwell (D-Wash.), and Angus King (I-Maine) jointly re-introduced their 21st Century Glass-Steagall Act. The legislation would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities.
Warren and Mnuchin squared off over their disagreement of what the law, in a more modern form, would entail.
“I really need to understand what you’ve just said. There are aspects of Glass-Steagall that you support, but not breaking up the banks and separating commercial banking from investment banking? What do you think Glass-Stegall was if that’s not right at the heart of it?”
Sen. Elizabeth Warren, (D-Mass.)
There have been many proposals “that would break up the banks and modernize the wall between commercial banking and investment banking,” Warren said, adding that Mnuchin himself, at his confirmation hearing, said the country could use a “21st-century Glass-Steagall.”
“And now, you’ve just said exactly the opposite,” she grumbled. “In the past few months, you and the president have had a number of meetings with big-bank CEOs and lobbyists. Is that the reason for the reversal on Glass-Stegall?”
“Not at all,” Mnuchin said. “There actually wasn’t a reversal … There are aspects of it we think may make sense. But we never said before we supported a full separation of banks and investment banking.”
“I really need to understand what you’ve just said,” Warren shot back. “There are aspects of Glass-Steagall that you support, but not breaking up the banks and separating commercial banking from investment banking? What do you think Glass-Stegall was if that’s not right at the heart of it?”
“If we had supported a full Glass-Stegall, we would have said that at the time. We said we believed in a ‘21st-century Glass-Stegall.’ We were very clear in differentiating it,” Mnuchin responded, claiming he was initially unaware that Warren and others also had a “21st century” version of the law in the works.
“The integration of commercial banking and investment banking has gone on for a long time,” he added. “That’s not what caused the problems during the financial crisis. If we did go back to a full separation, it would have an enormous impact on liquidity and lending … I never said we were in favor of breaking up the banks.”
Warren’s exasperated reply: “So let me get this straight. You’re saying you’re in favor of Glass-Steagall, which breaks apart the two arms of commercial banking and investment banking, except you don’t want to break apart the two parts of banking. This is like something straight out of George Orwell.”
THE TREASURY VIEW
The following are selections from testimony delivered by Secretary of the Treasury Steven T. Mnuchin before the Senate Committee on Banking, Housing, & Urban Affairs United States on May 18.
Turning to our domestic economic agenda, it has been more than 30 years since we have had comprehensive tax reform in this country. Combined with often imprudent regulations crafted in the midst of crisis, the engine of American prosperity has slowed. I believe that a goal of 3 percent GDP or higher economic growth is achievable if we make historic reforms to both taxes and regulation.
There are about 100 people working at the Treasury on the issue of tax reform. It is our goal to bring meaningful relief to middle income Americans and make American businesses competitive again. We will do this all while simplifying the system.
On regulatory reform, Treasury is preparing its initial report in response to the President’s Executive Order on “Core Principles for Regulating the United States Financial System.” These Principles provide a roadmap for the Administration’s approach to financial services regulation.
We have taken a systematic approach in our work by meeting with a variety of stakeholder groups to hear what works, what does not work, and what can be improved. Our initial report will contain recommendations to provide relief for community banks and make regulations more efficient, effective and appropriately tailored.
Another area that is crucially important to Treasury is our commitment to combatting terrorist activities and financing. We have announced a number of sanction actions against individuals and entities associated with destabilizing regimes like Syria, Iran, and North Korea. This work is essential to the Administration’s efforts to continue to keep Americans safe.
Source: Senate Banking Committee
Mnuchin, or so it seemed after the verbal gymnastics were exhausted, views a modern Glass-Steagall as something to reduce and rationalize the regulatory burden felt by small and mid-sized banks and credit unions.
U.S. Sen. Sherrod Brown (D-Ohio) also pushed back against oratory confusion. “Questions posed to the Secretary by me and other senators have gone either unanswered, or answered by non-sequiturs,” he said.
“The President launched the examination of Dodd-Frank with the claim that creditworthy borrowers can’t get loans. But the spigot isn’t dry,” he added. “Bank loans and profits are at record levels. Can we improve upon how we regulate the banks and the shadow banks and the rest of the financial services industry? Yes. I believe we can do so for smaller financial institutions. But let’s do so based on facts.”
In his remarks, Mnuchin addressed an ongoing regulatory review. The Treasury Department is preparing its initial report in response to the President’s Executive Order, issued in February, on “Core Principles for Regulating the United States Financial System.”
“These Principles provide a roadmap for the Administration’s approach to financial services regulation,” Mnuchin explained.
“We have taken a systematic approach in our work by meeting with a variety of stakeholder groups to hear what works, what does not work, and what can be improved,” he said. “Our initial report will contain recommendations to provide relief for community banks and make regulations more efficient, effective, and appropriately tailored.”
The review will ultimately entail a series of reports; the first of them, expected soon, will address banking regulations. “One of the big focuses we will make sure that, as we have different regulators, we have proper coordination between them,” he said.
Sen. Jack Reed (D-R.I.) inquired about the Dodd-Frank Act’s Orderly Liquidation Authority. In the case of a failure, does Mnuchin support “the mandatory removal of the megabanks executives and board members” responsible? Does he support the FDIC’s authority to claw back compensation from those executives and directors?
On the OLA, Mnuchin stressed that an extensive review was just beginning and it was “premature to comment.” On clawbacks: “As a general matter I would say that is a good policy.”
“Obviously, we don’t want to put taxpayers at risk in any way, and that was one of the reasons we are looking at all the core principles,” he added regarding efforts to resolve failing banks. Among those methods could be ensuring an appropriate mechanism for bankruptcy resolution.
The FSOC, which Mnuchin now chairs, has a “completely opaque process” for designating systemically important banks and non-banks, Sen. Pat Toomey (R-Pa.) lamented. Another problem: “the complete lack of a defined off-ramp” for firms that wish to escape SIFI designation by de-risking.
“Even firms like asset managers have to worry about being designated and they do not intermediate credit risk do not fund themselves with deposits, and do not have the kind of risk profile that banks have,” Toomey asked. “Can you assure us that under your leadership, the FSOC is not going to launch a whole new wave of designations and is not going to be run in this very opaque fashion?”
Mnuchin pledged transparency and better communication with firms that the FSOC’s regulators single out for systemic risk.