Trumponomics Brings Winds of Change for RegTech Industry (1 of 2)
In this two part series I look at the impact of the Trump Presidency on the regulatory environment in the US and opportunities and challenges it presents for the Regtech industry.
Regtech emerged as a new industry around 2009 when banks all over the world scrambled to get to grips with new financial regulations in the wake of the financial crisis. Banking is a hugely fragmented and competitive market. For most banks, competition is a game of micro seconds, not inches. Software was an obvious solution for managing the regulatory burden. Simply throwing people and spreadsheets at regulatory challenges wasn’t scalable or cost effective. In addition, Regtech presents tangible solutions that appeal to the C-Suite and could give banks an operational edge while keeping regulators at bay.
Winds of change
The Regtech industry is exciting because it’s built on a continuum of regulatory change. The technology will keep chasing changes in regulation so software companies will need to keep innovating. Until now the industry has been focused on overcoming the regulatory burden for large financial institutions that are shouldering most of the challenges from the financial crises. The US Regtech industry has yet to see a change in the direction of the regulatory tide since the collapse of the American banking system in 2008 and the introduction of Dodd-Frank in 2010. The 22,000 page tome set out to “To promote the financial stability of the United States by improving accountability and transparency in the financial system”. Dodd-Frank has a big focus on stabilising banks that are ‘too big to fail’. The law has a huge breath and scope and includes reforms such as the Volker rule, living wills, claw-backs and derivative regulation. In the Trump era the appeal of Regtech solutions for banks will not fade. However, the change of the regulatory tide presents opportunities and challenges for the new industry.
Era of deregulation
Trump called Dodd-Frank a “disaster”. By reforming it the new President wants to increase lending and reduce the capital requirements for banks. Change is coming from the top down. Trump recently nominated a new SEC president. Jay Clayton, a veteran Wall Street lawyer with a history of underwriting IPOs and bringing credit to the market. SEC President-elect Clayton said recently that “We need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers”. Bold words which could spell the resurgence of the US banking industry through deregulation.
Trump and Clayton have their sites firmly set on rolling back Dodd-Frank. In January of this year, Trump signed an executive order stating that for every new regulation issued, at ‘least’ two need to be retired. The new White House administration clearly wants to reduce the amount of regulatory complexity making it easier for financial institutions to do business.
The economic backdrop
The election of Trump has been contentious and divisive. Despite the controversy around his election Trump seems like a guy who wants to fulfill his pre-election promises. According to Trump, he will “be the greatest jobs producer that God ever created”. An easy way to create jobs (over an election term) is to introduce credit back into the economy.
Trump begins his presidency at an inflection point in the US economy. On the one hand the US equity markets have never been so high with the S&P 500 breaching 20,000 points in 2017. At the same time mortgage origination numbers are lower in 2017 than they were in 2000. During the same period the US population grew by close to 40 million so the banks are simply not lending. See table 1 below.
Pension stats show that its not the man on the street benefiting from the bull run in equities. According to Time, as many as 28% of baby boomers (55+) have no pension. More than half of the Generation X (35–54) cohort have nothing saved at all. Where is the money going? Not into the pockets of the average American.
Wealth creation is the cornerstone of the American Dream. With many American’s pension-less and unable to buy a home Trump clearly needs to focus on fixing the wealth inequality problem if he is serious about making ‘America great again’. Deregulation of the banks may play some part in this.
From a credit distribution perspective things are starting to improve. According to FDIC, there has been a spike in applications for US banking charters since Trump’s election. Many of the applications are coming from parts of the US that were badly hit by the recession like Tennessee, Georgia and Texas. The increase in activity is attributed to an anticipated reduction in the regulatory burden, lowers taxes and an expectation that interest rates will rise.
So the stage is set for a redirection of the US economy and a change in the regulatory environment. Western economies are on the cusp of becoming more protectionist and inward looking. The US is leading the charge. A relaxation of regulations and a massive investment in infrastructure projects will likely mean the US economy will grow over the course of the Trump presidency. While old regulations are retired, new ones will be introduced. There may be a thinning of US regulation, but ongoing changes and complexity will persist which is good news for regulatory problem solvers. The banking industry itself is changing though. The old guard are being replaced with agile innovative fintech startups. Many have the potential to side step regulation all together.
Within the context of Trump's new economic doctrine, I will examine the challenges and opportunities facing the Regtech industry in the second half of this series.