The Trump administration has delivered something to the financial service industry that has been missing in recent years: a voice.
After eight years of pariah status in Washington, investment management and banking professionals have vaulted into cabinet posts, senior staff positions and high-profile business advisory council chairs. Their assignment: roll back Dodd-Frank and the regulatory mandates triggered by the financial crisis. But as they attempt to carry out this mission, industry leaders should proceed with caution. An aggressive, anti-Dodd-Frank position risks further harm to industry credibility.
Indeed, the GOP-sponsored Dodd-Frank amendments, which appear to have the backing of the White House, would certainly provoke a bitter response from Democrats, consumers and other critics if any of the proposed legislative solutions are enacted. Banks would take a hit from that backlash.
Yet bankers can head off this cycle by using their new influence to proactively address bitterness and begin to repair their reputations. The key is to preempt critics and clearly acknowledge the legitimate and fundamentally valuable role that regulation plays in the U.S. financial system.
Accordingly, bankers cannot dismiss Dodd-Frank legislation as misguided or unreasonable. While undeniably dense and complex, the net impact of the legislation has made the system safer. Moreover, the aim of the legislation and other post-crisis reforms enhancing market stability clearly served the industry’s long-term best interests. The industry should highlight the impressive achievements of the post-crisis regulatory regime, including higher levels of capital and more ready access to high-quality assets, a more transparent derivatives market, stronger liquidity and new regulations improving money-market mutual funds.
By highlighting these achievements, banks can gain credibility as constructive voices on behalf of targeted reform. Indeed, these talking points may not only help tamp down partisan rhetoric that has alienated so many American voters but also set a tone for reasonable compromise and responsible policymaking. Under such conditions, industry-friendly reforms will likely find a receptive audience. After all, the public is weary of economic stagnation and has voted for a radically different policy direction.
Banks have a compelling argument that the post-crisis regulations handicapped economic growth. They have pulled back on lending under the burden of stress tests and other requirements. But as they engage with policymakers, bankers across the spectrum must be prepared to face skepticism from the same antagonists as before. The bitterness and anger is still fresh. Certain industry practices continue to discredit industry messages and undermine reputation.
Articulate leaders can answer the criticism by offering a review of management initiatives adopted since the financial crisis. At many institutions, compensation policies have changed. In addition, more trading businesses are rewarded based on the long-term performance of transactions and alignment with client interests.
Finally, bankers can applaud the leadership of regulators themselves. William Dudley, president of the Federal Reserve Bank of New York is one of these leaders. Under Dudley, the New York Fed has studied the dynamics of culture and ethics across member firms. Dudley has invited industry leaders to several annual New York Fed conferences to share findings and encourage more reform. In a recent speech to the G30, Dudley put it this way:
“Banks must restore their trustworthiness. Only then can they effectively perform their critical financial intermediation role in funneling funds from savers to borrowers, and in helping firms and households manage their finances and risk exposure.”
If the banking business is to succeed over the long term, industry leaders must be advocates of market stability and long-term capital formation.
Adjusting highly restrictive and costly regulations may help them perform these functions more efficiently, but these goals alone are self-interested and shortsighted. To restore public trust and reputation, the industry must communicate vision and a commitment to strong financial markets, risk-managed institutions and regulatory protections that truly make America great.