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Dan Loney: One expectation as the Trump
administration took office was that the regulatory landscape
might see some significant
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change, and that still could be
some of the case with some of the potential impacts playing
out. But will the regulations
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themselves change, especially in
and around the banking sector? Pleasure should be joined right
now by David Zaring, who is
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Professor of Legal Studies and
Business Ethics here at the Wharton School. Hi, David, great
to talk to you again. David Zaring: It's great
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to be here, Dan. - All right, so
as the election played out and you're thinking about the
landscape of regulation, what
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were your thoughts about what
we potentially could see us with some of the
rhetoric that had been put out
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there? - Yeah, I thought there could be
some real differences between sort of second Biden term and
Trump administration term. Maybe
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not as many in financial
regulation as you might see in other places. The Biden
administration had tried very
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hard to get a new capital rule
across the finish line, and they eventually failed to do that. So
I assumed they were going to
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come back with something. But
the Trump administration has also said, or at least Chairman
Powell has said, that the Fed
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wants to do a Basel III Endgame
rule. That's the rule that the Biden administration
couldn't get done. And so we'll
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see if that happens. But in some
ways, I think financial regulation may well be
different. I think there's a
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concern that there's too
burdensome set of sort of oversight on normal banks, and
that's going to change maybe.
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There will be some tailoring of
rules to make it more modest. The CFPB is obviously going to
be completely different over the
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course between the Biden
administration the Trump administration. That's the
Consumer Financial Protection
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Bureau, which the Trump
administration looks like they kind of want to shut down. And
then, I think, has a really
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different approach to crypto. - So is it not necessarily then
the regulations themselves, but
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how maybe the agencies would
work? You mentioned the CFPB. There's talk about, you know,
maybe some changes and different
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approach there. There's talk
about maybe cutting regulators from the Treasury Department. So
it might not necessarily be the
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regulations, but how these
agencies work. - Yeah, I think that will be
something -- excuse me. And one of
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the things that you have seen,
and I wonder if this will change a little bit, but banks used to
be worried that their
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supervisors would sanction them
on the basis of reputational risk, and that is the risk that
you're sort of doing business
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with some unsavory or maybe
unsound clients. That's going to be bad for your reputation. And
banks complained a lot during
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the Biden administration that
they were being sort of encouraged to de-bank crypto
firms and to maybe consider
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getting out of energy lending
because of reputational risk. You don't want to be seen as
somebody who's opposed to, you
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know, caring about the planet,
that kind of thing. And the Trump administration is
completely getting rid of
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reputational risk as something
supervisors can consider. But the way they did it is kind of
interesting, because they just
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sent out a memo to all their
supervisors and told them to stop considering reputational
risk. So the problem there is
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in the next, you
know, Elizabeth Warren, or whatever administration, she can
just rescind that memo and put
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back another memo. And so
that's a difference where, you know, personnel is
all that matters, but personnel
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doesn't always change regulation
for forever. And so I sort of wonder if they'll think about
doing a rule making on stuff
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like reputational risk, which
would be more permanent. - Does this, to a degree, though, show
how much the focus around the
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banking sector in the wake of
the financial crisis, you know, the changes that were made were
really even maybe more
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substantive than we gave them
credit for? - Yeah, I think there was
some sense that, you know, the
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Dodd Frank and the Obama
administration, after the financial crisis, didn't do
enough to reform a financial
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system that had really gone
awry. And I thought that the pandemic suggested that maybe
the Obama administration had
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done a pretty good job there.
The banking system really sailed through that crisis with flying
colors. And you know, it was not
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an easy crisis for other sectors
of the economy by any stretch of the imagination. So
that is, you know,
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a reform that maybe worked out
fine. And now the question is, as the financial crisis gets
further and further in the rear
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view mirror, you know, banks are
going to complain, "We're being over regulated. You know, when
we finalize this Basel III
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Capital rule, you're
departing too much from the minimum standards that is
really where we should be to
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create a
level playing field at the global level, and not, you
know, gold plate there." And I
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think that we're seeing a
current administration that looks like it's going to be
receptive to some of those
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complaints.
And so there, you may not just see difference in personnel
and policy of the
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administration, but some sort of
more longer term efforts to ease that regulatory burden. - Well
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take a moment and talk for a
second about Basel III and the potential impact that it could
have, because we talk so much
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about, you know, the banking
sector in the US, but there are certainly been instances we've
seen play out in the last few
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years of banks overseas and in
Europe specifically, that have had their issues and have
kind of gone awry of the rules.
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- Yeah, yeah. No, I think it's
fair to say that, you know, American regulators kind of take
the position that European
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banks are systematically under
capitalized, and that doesn't matter for all of them, but that
does mean that some of them are
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not sort of resilient to a bunch
of crises which have proven to be problematic for the European
Union where the economy isn't so
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great, and so the banking sector
is finding that lending is difficult and asset valuations
are hard to improve upon. And
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then in addition, you had
this effort to sort of finalize the Basel III Capital Accords
to make sure that everybody was
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well capitalized. And that sort
of hit a pause right now, because the United States can't
figure out exactly what it wants
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to do. And so the European Union
said, "Okay, well, we'll wait to see what happens in America,
and depending on what they do,
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that'll affect what we do." And
the same thing goes for the United Kingdom as well. So, you
know, we had this sort of global
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agreement that was supposed to
create uniform standards for banks, and it's largely done
that. But the most recent effort
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to, you know, improve upon those
standards is really kind of in turnaround while everybody waits
to see what, if anything, the
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United States does. - Well, then I'll wrap it up with this. What are you most watchful
on then right now, in terms of
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how the landscape could
potentially be adjusted in the months ahead? - I will be interested in seeing
if the US is serious about
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finalizing its Basel III
obligations. I'll kind of be interested in knowing, once it
does that, what's it think about
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these mid-sized regional banks?
There's a ton of them in Europe, and there were some in the
United States. And there was a
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blip in 2023 that really
affected those regional banks. And so one of the things that
the Biden administration's
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proposal wanted to do was bring
them into the toughest aspect of Basel III. And I think it's a
very open question as to whether
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the next administration, the
current administration, will continue that effort. So I'll be
interested to see, does Basel
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happen? If it does, what happens
to those mid-sized banks in the United States? And then I'll be
looking at sort of gobbledygook
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stuff like the supplemental
leverage ratio and whether that continues to be applied or
exempts treasury bills. Banks
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care a lot about this, and
hopefully your listeners do too. - Yeah, absolutely. Hey, David,
always great to chat. Thanks
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very much for your time today.
All the best. - Yeah, happy to do it. - You got it. David Zaring,
Professor of Legal Studies and
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Business Ethics here at the
Wharton School.