Whether they are or aren’t, the financial pronouncements coming from the White House are likely to be seen as the Goldman Sachs’ agenda for US financial services. The Goldman alumni are just very visible and perhaps are not perceived to be a very diverse group of advisers. Inevitably, questions will arise like is ‘what is good for Goldman?’ or ‘what Goldman thinks is good for America?’, actually good for America despite Goldman Sachs not actually having input. I want to leave Goldman out of the discussion for now, and also leave out the complexities of changing US banking regulation, and supervision, to think about a few of the suggested amendments to the US Dodd-Frank banking law. Let’s divide these in two (only the big ones for today): Conduct and Prudential.
While putting retirees’ interests first would seem a natural (and reduce future liability position) for US banks, the discussion of dropping the incoming fiduciary responsibility requirement for US pension advisers has wide ramifications. I was never clear on whether this was about cheapest, safest, or best value, however, the concept did seem clear. Many financial products for retirees have been excessively complex, generating high fees for limited value, particularly types of structured products (think about equity-like funds with guaranteed minimums where an investor could easily purchase an ordinary equity fund and treasury bond to accomplish the same for much lower fees). Removing the fiduciary requirement will offer more freedom to financial institutions, but just may be making tomorrow’s massive conduct liability case? How different is this from poor mortgage loans?
So far, it is too much regulation (volume, onerous) restricting credit and Volcker (limiting principal investment) reducing banks’ market role. I couldn’t agree more that the volume of post-crisis regulation has created an undue burden, particularly on America’s smaller banks, and this should be addressed in material application and other ways – but most of it is pretty important for the largest banks who have proved so unresolvable in bad times. However, on a recent visit to the USA, I noticed multiple offerings of 84-month car loans and that small banks, not finding enough small business loans, are investing in internet platform originated loans. These don’t indicate an absence of credit provision. I certainly haven’t heard any major corporations moan about lack of bank loan availability. On principal investing (i.e. Volcker), it is interesting that in the EU this has largely been dealt with through increased capital. Is this just a means of the US mimicking EU or means of increasing leverage at US banks? A recent well circulated note from a US congressman urged the Federal Reserve not to be dictated to by those in Foreign Lands…..but is it OK to copy them?
More to come – from Washington, of course.
Dr Peter Hahn is a Dean at The London Institute of Banking & Finance.