Getting it Right: Calibrating Regulation for Growth
By Kenneth E. Bentsen, Jr.
Nearly ten years since the financial crisis, the United States economy has recovered more quickly than other jurisdictions due in large part to our robust capital markets and diversified banking system. Our banks are far better capitalized and markets more resilient, having absorbed hundreds of new regulations on top of an already extensive regulatory structure established over the course of the last century.
For instance, the largest and most complex banking organizations operating in the US have:
- More than two times the Common Equity Tier 1 capital as a percentage of risk-weighted assets compared to 2008;
- More than three times more liquid assets as a percentage of deposits and as a percentage of total liabilities compared to before the financial crisis;
- Five times as much properly structured usable total loss-absorbing capacity, or TLAC.
While many reforms have increased transparency and stability, the multitude of them has led to much greater complexity, redundancy and conflicting goals, and in some cases unproductive curtailment of market activity. We are now experiencing bifurcation in the allocation of credit and capital, and constraints on our potential for economic growth. Case in point: issuance of corporate bonds for small and mid-sized companies (e.g. <$5 billion in assets) has declined while overall corporate bond issuance has increased; the number of IPO’s remains below its historical average; and post-recession economic growth remains at the low end of the range of the past ten recoveries. As we come toward the end of the post-crisis rulemaking cycle, a cumulative review of the rule set is long overdue.
The Treasury Department is doing just that with the release of its first report, A Financial System That Creates Economic Opportunities, in response to the President’s Executive Order on financial regulation. This is an extremely thoughtful and measured policy document drawing on input from across a spectrum of regulators, market participants, policymakers and consumer advocates. As one former policymaker and commentator stated, this document exemplifies “how policy should be made.” One of the principal authors, Counselor to the Secretary of the Treasury Craig Phillips stated at last week’s SIFMA-TCH Prudential Regulation Conference, “We need to look at rules in the whole since they interact with each other.”
While we’ve made good progress, post-crisis recovery has been too slow. Duplicative and outdated rules are creating market inefficiencies that inhibit businesses and entrepreneurs from tapping the capital markets and constrain opportunities for growth. Small businesses, accounting for more than 40 percent of private nonfarm GDP, are facing restrictions to their available credit and fewer firms are going public.
Today, we have reached an inflection point. We can review our financial regulatory structure — as Europe and Asia are already doing, but from a position of financial stability and resiliency. This gives regulators the opportunity to consider appropriate recalibration and modification of the rules to enhance credit allocation and capital formation, and therefore economic activity and job creation, while maintaining the financial stability we have achieved.
Kenneth E. Bentsen, Jr. is President and CEO, SIFMA
Photo courtesy of Bipartisan Policy Center
Dennis Lockhart, President and CEO, Fed. Reserve Bank of Atlanta, Crisis, Recession, and Recovery: 2007–16 (Jan. 9, 2017)
The Clearing House, The Capital Allocation Inherent in the Federal Reserve’s Capital Stress Test (Jan. 2017)
Credit Suisse Global Financial Strategies,The Incredible Shrinking Universe of Stocks (Mar. 22, 2017).