By Michael J. Moore and Yalman Onaran
(Bloomberg) --Wall Street’s high-flyers in Davos, basking in their firms’ strong fourth-quarter earnings, said they’re confident Donald Trump’s incoming administration will loosen regulatory constraints on financiers -- even if it leaves Barack Obama’s signature Dodd-Frank Act largely intact.
Bank executives, speaking on condition of anonymity at events around the Swiss ski resort, said they’re not counting on Trump to overturn Dodd-Frank. Instead, they expect the federal agencies that enforce the rules to ease up on them and support bankers’ efforts to limit how much capital and liquidity their companies need to pay bills or absorb losses in a crisis.
The bankers said they recognize that changing or overturning the 2010 Dodd-Frank Act would require support in the U.S. Senate that Republicans may lack. Instead they’re counting on Trump’s team to dial back how supervisory agencies enforce and interpret rules. Led by Federal Reserve Governor Daniel Tarullo, U.S. regulators have adopted an extra-strict version of the global standards on capital and liquidity set by the Basel Committee on Banking Supervision in the aftermath of the 2008 financial crisis.
“Legislation, obviously that’s harder to do than just changing regulations,” JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said in a Bloomberg Television interview with John Micklethwait on Wednesday. “Regulators can change a lot of things easily about compliance, about costs, certain rules about lending, how you use your liquidity, how you use your capital. I would like to see some of those looked at and maybe modified a bit, and I think it would be good for the economy.”
‘Very Positive’
At a panel discussion on the global banking outlook in Davos Thursday morning, JPMorgan asset-management CEO Mary Callahan Erdoes echoed that view.
“It’s going to be a great several years,” Erdoes said. “It’s going to be very positive for businesses in the U.S., which should cascade to businesses around the world.”
Goldman Sachs Group Inc. CEO Lloyd Blankfein offered a similarly optimistic view in an interview with Bloomberg Television in Davos on Thursday.
“If you look at the policies that Trump has committed himself to, they are quite stimulative and quite market-supportive,” Blankfein said. “If you look at spending on infrastructure, lower tax rate and overlapping regulation, they are quite stimulative, far more stimulative than what people were expecting had the Democrats won the election.”
The Goldman Sachs CEO also said there’s “an opportunity to re-legislate” financial regulations as the U.S. did with the Securities Exchange Act after the Great Depression.
“I think we’re going to open it up,” Blankfein said. “You can call it Dodd-Frank, as amended.”
Soaring Shares
Wall Street bank shares, including JPMorgan’s and Goldman Sachs’s, have rallied since the election on speculation that Trump’s policies will accelerate economic growth and drive higher interest rates.
While Trump’s transition team said after the election that it would work to “dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation,” few bankers see Dodd-Frank as a priority. Even billionaire investor Carl Icahn, who Trump appointed as a special adviser last month to overhaul regulations, said in a CNN interview that he wouldn’t support killing Dodd-Frank.
Several bankers in Davos said they’re optimistic that regulators under Trump could do away with the gold-plating by the U.S. of the latest Basel benchmarks and ease the process by which banks are stress-tested annually to ensure they have adequate capital to absorb losses in a hypothetical crisis.
In Europe, where bankers argue the region’s economic woes are exacerbated by the constraints on lenders, regulators have already helped delay agreement on a new set of global requirements.
Changing Regulators
The Federal Reserve has led U.S. rule-making efforts, including Basel implementation. Trump can appoint a vice chairman for regulation, effectively replacing Tarullo, who has filled the role unofficially and antagonized bankers with his strict approach to regulation. That, along with other appointments, could help tip the Fed toward a more bank-friendly approach.
It also could be wishful thinking. While criticizing Dodd-Frank, Republican leaders in Congress have backed even higher capital requirements than the Fed for the largest banks. Jeb Hensarling, chairman of the House Financial Services Committee, has proposed exempting banks from most other rules in exchange for 10 percent capital, almost twice as much as what big banks have now.
‘Not Free’
New regulators could also change the way Dodd-Frank is implemented. One part bankers hate the most, the Volcker Rule, bans the largest firms from making speculative bets with their own money. Trump’s Treasury secretary nominee Steven Mnuchin and Gary Cohn, the Goldman Sachs co-president named to serve as Trump’s chief economic policy adviser, are expected to be more sympathetic to banks’ arguments that limiting their trading hurts investors by making fixed-income securities less liquid.
While trading revenue has declined in recent years, the Volcker Rule and other restrictions didn’t prevent a jump last year, including at Goldman Sachs, where one trader made $250 million for his firm last year.
JPMorgan’s Dimon and other executives also have pushed against international liquidity standards that were part of the post-crisis Basel regime and designed to ensure that firms have enough easy-to-sell assets to meet claims coming due in a month and over a year.
“There’s $2.5 trillion sitting at the central bank called excess reserves,” Dimon said in Davos. “And we’re not free to lend it because of all these new requirements.”
Asked whether laws will change or just how they’re enforced, Bank of America Corp. CEO Brian Moynihan told Erik Schatzker in Davos that “I think it will be the implementation of regulation,” adding later that he expects a “regulatory debate about what the right regulation is and how it will be mitigated over time.”
--With assistance from Sonali Basak, Richard Partington, Stephen Morris and Ambereen Choudhury. To contact the reporters on this story: Michael J. Moore in London at [email protected] ;Yalman Onaran in New York at [email protected] To contact the editors responsible for this story: Christine Harper at [email protected] ;Peter Eichenbaum at [email protected] Robert Friedman, Keith Campbell