The Future Of Glass-Steagall And The Banking Industry

by: John M. Mason

- President Trump introduced the possibility of breaking up the large banks in his presidential campaign, and the the issue keeps coming up concerning what he might do about it.

- There are many other items on the President's plate these days, tax reform being one of them, and so the Trump administration may not get around to this in the near term.

- My guess is that with the continued changes taking place in finance due to advancements in information technology, the politicians, the regulators, and the industry better keep their focus elsewhere.

President Trump, as he was campaigning in the election last year, argued for a revival of the Glass-Steagall Act, legislation that had divided investment banks from deposit-holding institutions.
The original act had been passed in 1933 and had been repealed in 1999. Mr. Trump seemed to be trying to appear at a distance from Wall Street during the presidential campaign, especially given his efforts to closely tie Ms. Clinton to Goldman Sachs and other "big" banks.
Gary Cohn, now Mr. Trump's top economic advisor, but formerly the president of Goldman Sachs, has stated that he and the White House were "open" to a "21st century adaptation of the Glass-Steagall to make the financial system safer.
Some within the White House have suggested that Mr. Cohn's support for a return to the Glass-Steagall legislation was only a tip-of-the-hat toward what Mr. Trump had talked about during the campaign and that was all it was.
Enthusiasm for a full return to Glass-Steagall legislation seems to be lacking in Congress as well as at the White House.
Now, there appears to be some interest in what is called "Glass-Steagall lite," a watered down version of the earlier law.
The support behind this effort is Thomas Hoenig, the vice chairman of the Federal Deposit Insurance Corporation and former president of the Federal Reserve Bank of Kansas City. The basic ideas behind the "lite" version are, one, some kind of a "ring-fencing" like the one proposed within Great Britain between the deposit gatherers and the investment banks and a subsequent loosening of capital and liquidity restrictions.

The "ring-fencing" would allow financial institutions to keep both their deposit gathering capabilities and their investment banking side but would establish barriers between them so as to separate activities that contain different risk classes. There might be limits, for example, between how much a bank holding company might invest in an investment fund.
The reason for such a move is there is still concern that some separation needs to be achieved so as to reduce the riskiness of institutions so as to avoid another financial crisis like the one associated with the Great Recession.
But, even a "lite" version of the legislation is facing big problems in Congress. Some pundits argue that Republicans don't really like regulations and, therefore, do not really have their hearts in reintroducing Glass-Steagall ideas, especially since many of them have opposed this kind of legislation all of their political lives.
Others point to the failure of the White House in getting anything done on healthcare. Dark clouds are forming over any tax reform efforts - Treasury Secretary Mnuchin has now indicated that no tax bill would be passed through August and any changes in regulation would have to follow this major administration attempt.
Trump seems to be reversing himself on most things. Has all the talk about resurrecting Glass-Steagall or even going with a Glass-Steagall lite been nothing more than "get elected" talk? It would certainly not surprise me if this was the case.
Actually, I hope the Trump administration drops the idea of bringing back Glass-Steagall.
The Financial Times article cited above concludes with this take on Glass-Steagall and Glass-Steagall lite:

"Bankers said Mr. Cohn…had told them privately that little was likely to come of the Glass-Steagall plan. Another faction of policymakers believes the failure of standalone investment banks, such as Bear Stearns and Lehman Brothers, suggests the crisis would have happened with or without a Glass-Steagall Split. 
Most Wall Street banks, which have been agitating for deregulation, dislike the idea of a Glass-Steagall revival."
I would like to add one more argument to the side of letting Glass-Steagall continue to lie in peace.
This is the argument that the changes in information technology are changing the financial industry and will continue to change the financial industry regardless of how the regulations are changed over the near term.
I have written many posts recently - and over the past eight years - about how changing information technology is changing the banking industry, how it is changing finance. The spread of information and information technology is something that can only be slowed down a little from time to time, but will eventually dominate any sector of the economy.
This is why I have argued that globalization cannot really be stopped by protectionism - or, for that matter, about anything else. That is why FinTech is moving as rapidly as it is. Finance, money, bonds, stocks, and so on, are just information.
Furthermore, the nature of commercial banking, of all finance, in this age of rapidly growing financial innovation is constantly searching for ways to get around rules and regulations.
When I worked with the Federal Reserve, the talk within that institution was that the Fed was always about six months behind the new thing that the commercial banks were doing. The improvements and spread of information technology just contributed to the ability of the banks to find a way to do what they wanted to do. I can't imagine how far the commercial banks are ahead of the Federal Reserve today.
This makes changing the rules this way and then moving them back to where they were almost pointless, and it just adds expenses to the balance sheets of the banks. They go to all the trouble to adjust to a new set of rules and then, if the rules change back again, they have to go through even more expenses to revert back to the old system.
Readers of my posts know that I believe that the next five-to-seven year period is going to result in massive changes to the financial industry because of the changes coming from information technology. Best the banks and the regulators focus on how these adjustments can be made and what needs to be done to oversee and facilitate these changes.
One further note: I am not against higher capital requirements for the banking industry. Banks, commercial and otherwise, will always "push the edge" and use as much leverage as they can. This is the real reason why banks have always had to be regulated. Bankers, and I was one of them once, will cry and cry over the imposition of higher capital requirements, but they will do just fine if they are saddled with more conservative capital ratios than they might want. This, to me, just goes with the industry.
Reintroducing Glass-Steagall like regulation back into the law will, I believe, maintain a low profile over the next year or so. There is are many other important things to get done, like tax reform, to toss Glass-Steagall-like legislation into the mix. And, if it is postponed, maybe it will be forgotten.

0 comentarios:

Publicar un comentario