WASHINGTON — Treasury Secretary Steven Mnuchin criticized provisions in the Dodd-Frank Act allowing regulators to unwind failing financial institutions and barring banks from proprietary trading, saying fixes to those measures would be included in regulatory recommendations to the president due this summer.
Speaking Thursday during a conference by the Institute of International Finance, Mnuchin said the Treasury is working on compiling recommendations from regulators and the regulated community — including large and small banks, nonbank financial companies and others — to generate a unified set of policies to present to the president as part of an executive order issued in February.
“Some of it will be things we can do through the regulators, some of it can be done by the president through executive order, and some of it will need legislation,” Mnuchin said. "The major issues will be addressed in the June report.”
Specifically, Mnuchin said he has issues with the Federal Deposit Insurance Corp.’s orderly liquidation authority, which allows it to resolve a large failing financial institution rather than having its be resolved through traditional bankruptcy. That is something that the Treasury is “looking at very carefully,” he said.
“There are certain big concerns we have with OLA,” Mnuchin said. “We don’t want that to be used to support 'too big to fail.' On the other hand, there are aspects of the bankruptcy code right now that do not work for a financial institution that is in crisis. We’re going to fix that. So we’re going to come out with recommendations on OLA.”
The White House said late Thursday that President Trump would sign two presidential memorandums on Friday asking Treasury to review the FDIC's orderly liquidation authority and the designation activities of the Financial Stability Oversight Council. It wasn't immediately clear why the memos were necessary, since it is already within Mnuchin's existing purview to review all parts of Dodd-Frank.
During his remarks on Thursday, Mnuchin also singled out the Volcker Rule — a Dodd-Frank requirement that bars banks from trading on their own accounts — as an unnecessary add-on during the legislative process that is a source of consternation for the administration and an area in need of reform.
“I don’t think the Volcker Rule had anything to do with the financial crisis,” Mnuchin said. “I think it was more of a political issue than I think it was necessarily a problem during the financial crisis.”
Mnuchin added, however, that he does not think that “within the banks, the regulated institution is the place for proprietary trading.” Instead, regulators should take a more generous interpretation of what qualifies as proprietary trading, especially in businesses that are fundamentally customer-facing.
“I think the biggest problem with the Volcker Rule right now is, we all know that when you’re sitting in a room with two Bloombergs and a telephone and that’s all you do, that’s proprietary trading,” Mnuchin said. “But this should be relatively simple. If you’re sitting in a customer business and you’re doing customer trades and you’re facilitating the business … I think the right thing to conclude is that you’re acting within the context of the customer business.”
Gary Cohn, chairman of the White House National Economic Council, said during a later panel at the same conference that, generally speaking, one of the administration’s goals in implementing regulatory reform is to put in place top regulators who are more inclined to give businesses the benefit of the doubt.
“A lot of it is getting enough personnel in the positions that will help us on the deregulatory agenda,” Cohn said. “Personnel is policy, and changing the personnel will change the policy.”
Mnuchin’s comments come only a day after former Federal Reserve Chairman Paul Volcker — for whom the Volcker Rule is named — laid out his own thoughts about the post-crisis regulatory regime and cautioned against sweeping changes. With respect to the OLA provision, Volcker said the claim that OLA somehow preserves the concept of "too big to fail" misses the point. Eliminating or modifying OLA, rather, would be more likely to result in a bank bailout than leaving it in place, he said.
“Under the provisions of OLA, the failing institution will, by any reasonable definition of the word, have in fact failed — there is no ‘taxpayer bailout,’ ” Volcker said. “Rather, it is the absence of the resolution framework that might inexorably lead some future government to rescue big failing financial institutions, just as happened in 2008.”
Volcker also defended his namesake rule and its implementation, while acknowledging that the five years that regulators, “each with different priorities and financial industry relationships, haggled endlessly over the precise interpretation and enforcement of the legislative intent.” But he said it is also worth noting that the rule corrected clear and pervasive conflicts of interest within banks, while essentially precipitating a migration of the most aggressive proprietary trading activities into the shadow banking sector.
“We must also be mindful that the combination of large banks and trading activities does give rise to chronic problems of conflicts of interest and potential degradation of customer relationships,” Volcker said. “My sense is that the large banks with sizable trading operations have been adjusting to the basic requirements. There has also been a clear tendency for the more aggressive traders to leave the government-protected banking organizations for relatively unregulated hedge funds or other firms.”