Now that we are a couple of months into the Trump presidency it is important to take stock and determine how risk management at financial institutions will be impacted by the likely changes that appear on the horizon.
General economic expectations
The markets expect financial institutions to benefit from a Trump administration. Financial institutions have seen their stocks soar in the months since the election. The large financial services indexes have seen their shares rise between 20-50% in the intervening months. Meanwhile the stock market, as a whole, has risen only 10-15%.
It is important to understand what factors might be influencing the expectation that financial institutions will outperform other industries under the current administration.
Changes in trade policy and reduced taxes have been two of the core proposals offered by the Trump administration. Changes in trade may have longer term impact on the financial services industry, and reduction in corporate taxes is certain to benefit all corporations. While critical to the economy overall, trade and taxes alone do not explain the market expectation that financial institutions will outperform the market as a whole.
How financial institutions will benefit
Three critical areas where financial institutions specifically are likely to benefit from the current administration’s stated agenda:
1. Increased government spending is expected to benefit financial institutions
Banks and other financial institutions thrive in a growing economy. The current administration’s plan to rebuild infrastructure and expand defense spending may be ultimately inflationary, but will provide enormous opportunities for financial institutions financing such expansion.
2. Rising interest rates will help lenders
Rates are rising. In the first five months since the election the benchmark 10 year treasury has climbed a full 50 basis points and is approaching the highest level in nearly six years. Banks and other lending institutions have struggled to make money in the lending business with rates as low as we have seen in recent years. If rates continue to rise, as generally expected, lenders and the financial markets anticipate that lending margins will improve.
3. Reduced financial regulation will lessen the burden of financial institution compliance
Most impactful for risk management and insurance managers will likely be the administration’s proposal to reduce financial regulation.
Nothing in the order explicitly dictates an intention to loosen financial regulation or unwind parts of the post-financial crisis Dodd-Frank Act. The order does, however, expound the administration’s intent to “make regulation efficient, effective, and appropriately tailored.”
Trump has stated that he expects to cut major parts of Dodd-Frank because he believes the law makes it too difficult for businesses to borrow money.
In another example, Trump has ordered that the recently enacted Department of Labor investment-advice rule (that expands the fiduciary standard for investment advice) be delayed for six months. The rule had been the result of a fierce six year battle and was scheduled to be phased in starting in April 2017. (See our blog post on the subject.)
Who is enforcing and interpreting regulations
Increased government spending, rising interest rates and reduced regulation are all favorable for the financial services industry – but equally critical is who will be enforcing and interpreting the laws impacting financial institutions in the coming year. That is where the current administration may have the most powerful and lasting impact.
The current administration has been slow in appointing senior officials in its first few months in office, but risk managers should recognize that those appointments could influence markets for years to come.
The nomination of Neil Gorsuch to the Supreme Court, while significant, not represent the most meaningful appointment for most financial institutions.
Most business litigation is handled by lower federal courts, particularly the federal district courts. Approximately 14% of federal judicial positions are currently vacant – over 100 benches without judges. That is twice the number of vacancies that President Obama inherited from President Bush in 2009.
This administration, with controlling votes in both houses of Congress, could well be on track to appoint more federal judges than any administration in history.[i] How those judges interpret laws affecting consumer protection, shareholder’s rights, executive pay and management liability will impact financial institutions in ways we can only speculate. That impact will most certainly be profound.
Regulators & the DOJ
The Securities and Exchange Commission (SEC)
President Trump has nominated a Wall Street lawyer, Jay Clayton, from the prestigious firm of Sullivan & Cromwell to head the SEC. His clients included some of the largest financial institutions on Wall Street.
If Clayton chooses to focus on regulatory and finance rather than enforcement matters it could be expected that we will see fewer enforcement actions brought by the commission. Fewer enforcement actions would, in turn, lead to fewer follow-on claims and litigation that relies on the enforcement finding.
Consumer Financial Protection Bureau (CFPB)
President Trump has been critical of the Bureau that came into existence during the Obama administration and represents a powerful, if controversial, regulatory force in consumer protection.
The CFPB has been instrumental in a number of high profile cases brought in the last two years against large financial institutions involving claims of fee overcharges, usury and unethical sales techniques. Terminating, or substantially weakening, the CFPB could reduce the potential for enforcement action resulting from consumer protection cases against financial institutions.
Department of Justice
Former Senator Jeff Sessions has been named Attorney General. He is directly responsible for enforcement of federal criminal laws. In his confirmation hearings, the new Attorney General emphasized his intention to prioritize white collar crime and punish corporate misbehavior.
President Trump and AG Sessions recently announced the firing of the U.S. Attorney in Manhattan, Preet Bharara. This is critical because this is the office of the Department of Justice that manages most of the high profile financial institution prosecution cases. As of this writing no permanent replacement has been named.
So while there is an Attorney General, with a stated intent to prosecute white collar crime and a reputation as a former prosecutor and defender of law and order, at present there is no permanent head of the most vital office – once nicknamed the “sheriff of Wall Street.” Until the key positions are filled it is difficult to anticipate when financial crime prosecution will come to the forefront.
The Foreign Corrupt Practices Act
Perhaps no single issue illustrates the current administration’s attitude toward government intervention in business like the Foreign Corrupt Practices Act (FCPA). The FCPA makes it illegal for US companies to engage in corrupt acts such as bribing government officials. Under the law, American companies are restricted from accepting “off-book” payments.
Trump has long been a critic of the FCPA, claiming that it would put the U.S. at a disadvantage because competing countries are not as aggressive about enforcing anti-corruption rules. FCPA is, however, the law. During his confirmation hearings Attorney General Sessions was asked directly if he would enforce the FCPA. He responded, “Yes, if confirmed as attorney general, I will enforce all federal laws, including the Foreign Corrupt Practices Act and the International Anti-Bribery Act of 1998.”
We know that the current administration would like to see less regulation for financial markets. We know that they are moving toward limiting the powers of some regulatory bodies (particularly the CFPB). We know that the relevant appointees to date are experienced financial markets experts and prosecutors. What remains to be seen is whether this will result in less enforcement action as recent share movement would seem to suggest?
Less enforcement activity, whether as a result of policy or as the result of delayed staffing, should result in fewer suits and claims against financial institutions.
[i] In eight years in office Ronald Reagan appointed 376 federal judges.
Michael O’Connell is the Financial Institutions Group Practice Leader for Willis Towers Watson North America. In this role, Michael is responsible for expanding WTW’s footprint in the Financial Institutions sector in North America. He works closely with WTW’s Global Financial Institutions Industry Group to focus on the unique needs of banks, asset managers, insurance companies.