An insider - on Trump, trade and a rocky road ahead

The move by a new U.S. President to rewrite the punitive Dodd Frank legislation is needed, says former IIF Managing Director, Charles Dallara. Compliance costs for financial institutions are, in many cases, “virtually unmanageable” . . .

THE WORLD needs to buckle its collective seat belt for a period of volatility as it witnesses, probably for the next six to 12 months, a new US Administration finding its way in dealing with both domestic and foreign issues.
 That is the considered opinion of someone who could be seen as the ultimate Washington insider — Charles Dallara.
 Dallara was intimately involved with the global financial sector for more than a decade through to 2013 as head of the Washington-based Institute of International Finance (IIF), the world  banking watchdog and advocate.
 He was central to negotiations between banks and governments over that period, which included the GFC and the Greek debt crisis in Europe. He also served in the Reagan and Bush Senior Administrations.
 Now Vice Chairman of the Board of Directors, and Chairman of the Americas of the Zug-based global asset manager, Partners Group, Dallara remains an important sounding board, and an authority on both the U.S. and global financial sectors.
 Unsurprisingly, the Trump Campaign Team sought out his views on financial sector issues and financial regulations in the lead-up to the U.S. Presidential elections.
 Asked if Trump is good at taking advice, Dallara responds: “He is listening.  He has strong views, there is no question of that. Sometimes he acts very quickly to reflect those views.”
 Dallara says some of Trump’s early decisions — such as the initial steps he announced on rewriting of the punitive Dodd Frank legislation, which was brought in to regulate financial institutions in the wake of the 2008 Global Financial Crisis — have been well supported by the financial industry.
 Speaking to ATI Magazine before leaving for a trip to China to meet senior Chinese officials, Dallara said: “I have considerable sympathy for what President Trump is trying to do in some areas. For example, while I believe there was a clear need for strong regulation following the global financial crisis, the pendulum has swung way too far.
“A huge burden of regulation has been imposed on the financial sector without comparable benefit, especially on regional and community banks as well as credit unions.” Dallara cites the Volcker Rule under the Dodd Frank legislation. He thinks it will do little to actually avoid future financial crises — but it has reduced liquidity in the market.
“It generates unnecessary costs for financial institutions and their shareholders. The combined imposition of capital and liquidity requirements as well as the leverage ratio has made it difficult for banks to support the economy in the U.S., especially small and medium sized-businesses, and this has been quite visible.
 “In the early stage of the recovery, particularly in the period from 2010 to 2013, we saw restrained credit to these sectors, inhibiting job creation and renewed growth after the severe recession of 2009.
“We still see very meagre credit flows in Europe. In part, this can be attributed to the low quality and number of creditworthy borrowers, but this is also due to the excess swing of the regulatory pendulum, imposing such substantial capital and liquidity requirements that many profitable enterprises have been starved for credit.
“We do have too much regulation in place today. I believe the pendulum does need to be swung back.”
 Dallara says there needs to be some relief from compliance costs that he believes, in many cases, are “virtually unmanageable”.
Financial institutions should be allowed to breathe, he adds, to allow them to extend credit to borrowers, particularly regional banks, community banks and credit unions, which have been hit by these heavy regulations.
 But Dallara continues to stress the need to keep in place some of the prudential requirements imposed over the last few years. He says a “huge amount” of mistakes were made in the lead-up to the GFC.
Trump, he says, is building a strong team around him, and will learn as he goes about the complexity of some of these issues.
“The new President has brought some very capable people in from the financial sector,” he says. “I don’t think we should get too distracted by whether they are from Goldman (Sachs) or Wall Street.” He is referring to Stephen Mnuchin, Treasury Secretary, and Gary Cohn, Head of the White House National Economic Council.
 However, the President and his team need to approach reform, particularly of financial regulations, with care, Dallara says. There is a huge amount of detail to absorb, and it will require the co-operation of Congress. This will take time.
 “Ultimately, my instinct in this area is that we will find a better balance than we have so far,” Dallara told ATI.
 “Part of the regulation we have seen in the past eight or nine years is punitive and divisive. I always felt that that was misguided.
 “Of course, banks need to be fined where they have violated regulations.
 “But we have a system in the U.S. today where the judiciary branch is independent of the regulators and imposing its own fines on banks and financial institutions without much justification for the scale of those fines.
“While this is fine as far as checks and balances in our system goes, it is also unclear that the fines being imposed on banks and financial institutions have a clear rationale in terms of the scale of these fines.
“This is making it more difficult for some banks to regain profitability and credibility in the financial markets as they fight legacy problems from over a decade ago. It is not clear how much this serves the public interest.”
 The Trump Administration has also pledged to act on tax reform, infrastructure spending and fiscal policy.
“We added more and more taxes in the Obama era, many of them burdening the middle class and business,” says Dallara.
 “Rewriting of tax law to encourage repatriation of capital from abroad will lead to higher levels of investment in the US economy itself.”
 Deregulation in many areas of the broader American economy is also needed, he adds.
 “Energy being one. Again, there needs to be balance here. You need to be aware of environmental concerns — there is still some need for deregulation.
 “Obviously we are in dire need of an infrastructure programme. And this will need to be closely co-ordinated with the private sector and firms like my own — Partners Group – where we can bring private capital as well as public capital to bear.”