Unlike the response to his executive order on immigration, thousands of citizens did not hit the streets to protest President Trump’s executive order on “core principles” for regulating the financial system. No clever signs, no calls to “Dump Trump” — just resignation to the fact that a new attitude toward regulation is upon us.

There will be no do-over of the Core Principles as with the immigration executive order. These regulatory principles are set in stone as the position of the administration. It’s a safe bet that every candidate for a senior regulatory position has committed each of the seven principles to memory and has an explanation ready for how he or she will carry them forward if nominated and confirmed.

The principles have been labeled as “fairly noncontroversial” by a bipartisan think tank. I respectfully disagree. The Core Principles, read in conjunction with the president’s executive order released just four days earlier entitled Reducing Regulation and Controlling Regulatory Costs, will serve as the touchstone for financial regulators in the years ahead.

Donald Trump
It has not received as much attention as other moves by the Trump administration, such as immigration policy, but the executive order laying out "core principles" on financial regulation deserves a close reading. Bloomberg News

The principles, however, are somewhat open to interpretation, and they leave much to the imagination in terms of how the government will enact regulatory policy over the coming years. It is well to consider them seriously.

“Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth”

It is hard to argue with this principle, except that “empowering” consumers suggests that the the government will be stepping away from protecting them.

This does not bode well for the future of the Consumer Financial Protection Bureau, which specializes in protection. Nor does it bode well for financial institutions assuming a fiduciary role for their customers; speaking of which, an executive order issued the same day as the principles appeared to support doing away with the Department of Labor’s fiduciary rule.

Financial institutions should be wary of policy that backtracks from consumer protection as a basis in consumer law. This is particularly true for new financial services entrants such as fintechs. Few participants in this nascent industry would go so far as to write protection out of the consumer laws.

“Prevent taxpayer-funded bailouts”

This sounds a lot like the Dodd-Frank provision “eliminating expectations” that certain firms will be bailed out by the government. But that was so weak that all Dodd-Frank succeeded in doing was further entrenching the positions of the six too-big-to-fail banks (Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo).

Preventing or eliminating bailouts can only be achieved by taking these six leviathans down a notch or two, for example by subjecting them to size limitations or more forcefully removing their market guarantees, or both.

If the Trump administration punts on this issue, as Dodd-Frank did, it could bring political risk. The issue of “too big to fail” is galvanizing for the left base of the Democratic Party. A less-than-resolute plan for dealing with big banks’ unfair advantage could strengthen Sen. Bernie Sanders, who seized on the issue effectively in 2016, or another opponent to set the stage for 2020.

“Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry”

This one is a head-scratcher. Dodd-Frank critics often support a “cost-benefit analysis” following the issuance of a regulatory proposal. But the mention here of a “regulatory impact analysis” seems somewhat different. Is the administration embracing an altered approach?

Since Dodd-Frank’s passage, the industry has repeatedly called for analyses to weigh the economic effects of proposed regulations. But these calls for cost-benefit analyses seem aimed simply at thwarting rules promulgated under Dodd-Frank; many have argued that a conclusive cost-benefit analysis is simply not achievable in many cases. For one thing, cost-benefit analyses run the risk of focusing too narrowly on the industry’s costs without looking more broadly at how consumers and the economy benefit from regulation in the long term.

Now, a regulatory impact analysis, which sounds similar to an environmental impact statement, seems eminently more doable and possibly more meaningful. The Organization for Economic Co-operation and Development describes regulatory impact analyses as able to “underpin the capacity of governments to ensure that regulations are efficient and effective in a changing and complex world.”

Incorporating in that analysis moral hazard, systemic risk, information asymmetry and market failures — as the Core Principles outline — seems appropriate in some but not all cases. But there should be an even broader focus. What about regulatory burden, unintended consequences, competitive impact and effects on job creation?

“Enable American companies to be competitive with foreign firms in domestic and foreign markets”

Be careful what you wish for.

The aim of this principle may be to allow for U.S. financial companies to be more innovative and therefore compete with foreign firms embraced by friendly home governments. Perhaps the new administration is suggesting that the U.S. create a fintech “sandbox” patterned after the sandbox developed in the U.K., which has helped nurture technology advancement there.

This would be a reasonable conclusion since the administration official who has been the most visible with regard to the Core Principles, Gary Cohn, is a former Goldman Sachs executive; Goldman has been a vocal player in fintech development.

But the corollary to this principle would be how foreign financial firms — and their regulators — react. Other nations may insist that entry into their market requires their companies being able to compete in the U.S. Are we really ready for Alibaba and Ant Financial competing in our domestic markets in exchange for Bank of America being able to establish retail branches in China?

“Advance American interests in international financial regulatory negotiations and meetings”

This is a facially innocuous principle. However, in the context of a race to the bottom among competing global regulatory regimes, it offers little guidance and perhaps sends the wrong message. Surely it does not advance our interests for U.S. regulators to debase their standards in the face of regulatory arbitrage by the firms under their jurisdiction. In international regulatory negotiations, whether at the G-20, the Financial Stability Board or Basel, is it no longer possible for the U.S. to lead by example?

“Restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework”

In the battle for passage of Dodd-Frank, rationalization of the federal regulatory framework fell victim to intense lobbying and the 60-vote rule in the Senate. The same lobbyists are still in D.C. and so is the required 60-vote threshold. Common-sense proposals to streamline the regulatory agencies, such as a merger of the Securities and Exchange Commission and Commodity Futures Trading Commission, have failed to advance.

Recall that structural reform of the regulatory apparatus was originally proposed by Democratic Sen. Christopher Dodd, one half of Dodd-Frank’s leadership duo. Perhaps one-party control of both chambers of Congress and the White House can lead to a different result this time around. It’s hard to imagine that this principle was inserted on the list without contemplation of a fight ahead.

Hold onto your hats.

Cornelius Hurley

Cornelius Hurley

Cornelius Hurley is the director of the Boston University Center for Finance, Law & Policy and executive director of the Online Lending Policy Institute.

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