00:00:00
Dan Loney: One expectation as the Trump
administration took office was
00:00:03
that the regulatory landscape
might see some significant
00:00:07
change, and that still could be
some of the case with some of
00:00:11
the potential impacts playing
out. But will the regulations
00:00:15
themselves change, especially in
and around the banking sector?
00:00:19
Pleasure should be joined right
now by David Zaring, who is
00:00:21
Professor of Legal Studies and
Business Ethics here at the
00:00:24
Wharton School. Hi, David, great
to talk to you again. David Zaring: It's great
00:00:27
to be here, Dan. - All right, so
as the election played out and
00:00:32
you're thinking about the
landscape of regulation, what
00:00:37
were your thoughts about what
we potentially could see us with
00:00:41
some of the
rhetoric that had been put out
00:00:45
there?
00:00:46
- Yeah, I thought there could be
some real differences between
00:00:50
sort of second Biden term and
Trump administration term. Maybe
00:00:55
not as many in financial
regulation as you might see in
00:00:59
other places. The Biden
administration had tried very
00:01:03
hard to get a new capital rule
across the finish line, and they
00:01:09
eventually failed to do that. So
I assumed they were going to
00:01:12
come back with something. But
the Trump administration has
00:01:14
also said, or at least Chairman
Powell has said, that the Fed
00:01:19
wants to do a Basel III Endgame
rule. That's the rule that
00:01:24
the Biden administration
couldn't get done. And so we'll
00:01:27
see if that happens. But in some
ways, I think financial
00:01:32
regulation may well be
different. I think there's a
00:01:35
concern that there's too
burdensome set of sort of
00:01:41
oversight on normal banks, and
that's going to change maybe.
00:01:47
There will be some tailoring of
rules to make it more modest.
00:01:50
The CFPB is obviously going to
be completely different over the
00:01:54
course between the Biden
administration the Trump
00:01:57
administration. That's the
Consumer Financial Protection
00:02:00
Bureau, which the Trump
administration looks like they
00:02:02
kind of want to shut down. And
then, I think, has a really
00:02:05
different approach to crypto.
00:02:08
- So is it not necessarily then
the regulations themselves, but
00:02:13
how maybe the agencies would
work? You mentioned the CFPB.
00:02:17
There's talk about, you know,
maybe some changes and different
00:02:21
approach there. There's talk
about maybe cutting regulators
00:02:25
from the Treasury Department. So
it might not necessarily be the
00:02:28
regulations, but how these
agencies work.
00:02:31
- Yeah, I think that will be
something -- excuse me. And one of
00:02:37
the things that you have seen,
and I wonder if this will change
00:02:43
a little bit, but banks used to
be worried that their
00:02:47
supervisors would sanction them
on the basis of reputational
00:02:51
risk, and that is the risk that
you're sort of doing business
00:02:55
with some unsavory or maybe
unsound clients. That's going to
00:03:00
be bad for your reputation. And
banks complained a lot during
00:03:04
the Biden administration that
they were being sort of
00:03:06
encouraged to de-bank crypto
firms and to maybe consider
00:03:12
getting out of energy lending
because of reputational risk.
00:03:16
You don't want to be seen as
somebody who's opposed to, you
00:03:20
know, caring about the planet,
that kind of thing. And the
00:03:24
Trump administration is
completely getting rid of
00:03:26
reputational risk as something
supervisors can consider. But
00:03:30
the way they did it is kind of
interesting, because they just
00:03:35
sent out a memo to all their
supervisors and told them to
00:03:39
stop considering reputational
risk. So the problem there is
00:03:42
in the next, you
know, Elizabeth Warren, or
00:03:45
whatever administration, she can
just rescind that memo and put
00:03:49
back another memo. And so
that's a difference
00:03:53
where, you know, personnel is
all that matters, but personnel
00:03:55
doesn't always change regulation
for forever. And so I sort of
00:03:59
wonder if they'll think about
doing a rule making on stuff
00:04:02
like reputational risk, which
would be more permanent. - Does
00:04:05
this, to a degree, though, show
how much the focus around the
00:04:11
banking sector in the wake of
the financial crisis, you know,
00:04:15
the changes that were made were
really even maybe more
00:04:19
substantive than we gave them
credit
00:04:22
for? - Yeah, I think there was
some sense that, you know, the
00:04:27
Dodd Frank and the Obama
administration, after the
00:04:30
financial crisis, didn't do
enough to reform a financial
00:04:37
system that had really gone
awry. And I thought that the
00:04:42
pandemic suggested that maybe
the Obama administration had
00:04:46
done a pretty good job there.
The banking system really sailed
00:04:50
through that crisis with flying
colors. And you know, it was not
00:04:54
an easy crisis for other sectors
of the economy by any stretch of
00:04:58
the imagination. So
that is, you know,
00:05:04
a reform that maybe worked out
fine. And now the question is,
00:05:10
as the financial crisis gets
further and further in the rear
00:05:13
view mirror, you know, banks are
going to complain, "We're being
00:05:17
over regulated. You know, when
we finalize this Basel III
00:05:21
Capital rule, you're
departing too much from the
00:05:24
minimum standards that is
really where we should be to
00:05:28
create a
level playing field at the
00:05:31
global level, and not, you
know, gold plate there." And I
00:05:36
think that we're seeing a
current administration that
00:05:39
looks like it's going to be
receptive to some of those
00:05:41
complaints.
And so there, you may not just
00:05:45
see difference in personnel
and policy of the
00:05:48
administration, but some sort of
more longer term efforts to ease
00:05:52
that regulatory burden. - Well
00:05:54
take a moment and talk for a
second about Basel III and the
00:05:57
potential impact that it could
have, because we talk so much
00:06:00
about, you know, the banking
sector in the US, but there are
00:06:03
certainly been instances we've
seen play out in the last few
00:06:06
years of banks overseas and in
Europe specifically, that have
00:06:11
had their issues and have
kind of gone awry of the rules.
00:06:15
- Yeah,
00:06:16
yeah. No, I think it's
fair to say that, you know,
00:06:22
American regulators kind of take
the position that European
00:06:25
banks are systematically under
capitalized, and that doesn't
00:06:28
matter for all of them, but that
does mean that some of them are
00:06:33
not sort of resilient to a bunch
of crises which have proven to
00:06:38
be problematic for the European
Union where the economy isn't so
00:06:42
great, and so the banking sector
is finding that lending is
00:06:46
difficult and asset valuations
are hard to improve upon. And
00:06:52
then in addition, you had
this effort to sort of finalize
00:06:56
the Basel III Capital Accords
to make sure that everybody was
00:07:01
well capitalized. And that sort
of hit a pause right now,
00:07:05
because the United States can't
figure out exactly what it wants
00:07:09
to do. And so the European Union
said, "Okay, well, we'll wait
00:07:12
to see what happens in America,
and depending on what they do,
00:07:16
that'll affect what we do." And
the same thing goes for the
00:07:19
United Kingdom as well. So, you
know, we had this sort of global
00:07:22
agreement that was supposed to
create uniform standards for
00:07:25
banks, and it's largely done
that. But the most recent effort
00:07:30
to, you know, improve upon those
standards is really kind of in
00:07:36
turnaround while everybody waits
to see what, if anything, the
00:07:38
United States does.
00:07:40
- Well, then I'll wrap it up with
00:07:42
this. What are you most watchful
on then right now, in terms of
00:07:46
how the landscape could
potentially be adjusted in
00:07:49
the months ahead?
00:07:51
- I will be interested in seeing
if the US is serious about
00:07:57
finalizing its Basel III
obligations. I'll kind of be
00:08:00
interested in knowing, once it
does that, what's it think about
00:08:04
these mid-sized regional banks?
There's a ton of them in Europe,
00:08:07
and there were some in the
United States. And there was a
00:08:09
blip in 2023 that really
affected those regional banks.
00:08:13
And so one of the things that
the Biden administration's
00:08:16
proposal wanted to do was bring
them into the toughest aspect of
00:08:21
Basel III. And I think it's a
very open question as to whether
00:08:27
the next administration, the
current administration, will
00:08:30
continue that effort. So I'll be
interested to see, does Basel
00:08:34
happen? If it does, what happens
to those mid-sized banks in the
00:08:37
United States? And then I'll be
looking at sort of gobbledygook
00:08:40
stuff like the supplemental
leverage ratio and whether that
00:08:44
continues to be applied or
exempts treasury bills. Banks
00:08:48
care a lot about this, and
hopefully your listeners do too.
00:08:51
- Yeah, absolutely. Hey, David,
always great to chat. Thanks
00:08:54
very much for your time today.
All the best. - Yeah, happy to do
00:08:56
it. - You got it. David Zaring,
Professor of Legal Studies and
00:08:59
Business Ethics here at the
Wharton School.
