The Latest Indicator of the Onset of Regulatory Amnesia: Trump Takes Aim at the OFR

We know here in Financial Regulation Matters that there were a number of initiatives set up in the wake of the Financial Crisis, with all of them theoretically designed to guard against a crisis of similar, or even worse proportions. Some have been somewhat of a success, and others less so, but recently the Trump administration took aim at an agency which is purposely designed to guard against another crisis by providing cutting-edge research to regulators. In this post we will examine the Office of Financial Research (OFR) and the news that the agency will soon be experiencing even more job cuts, alongside a further depletion of its resources. The question will be whether this constitutes just the latest in a string of events which suggest the onset of ‘regulatory amnesia’, or the culling of an agency that sounds good in theory, but could never have been effectual in the real world.

As part of the many reforms brought forward by the Dodd Franck Act of 2010, the Office of Financial Research was created, and was designed to support the Financial Stability Oversight Council(FSOC), which itself sits within the Treasury Department. The OFR’s official mandate is to look across ‘the financial system to measure and analyse risks, perform essential research, and collect and standardise financial data’, and to protect it from a myriad of potential influences, it was designed so that it would be funded by assessments taken from financial institutions. The Office also has the power to issue subpoenas to institutions and people who are not forthcoming with the necessary information required. On paper this initiative sounds like it is particularly well placed to furnish the regulatory environment with the up-to-date and critical research it needs to guard against future crises. However, there is an obvious problem with this aim. That problem is that by doing so, there is the potential that the Office will stifle growth in areas which are beneficial to both the financial marketplace, and also politicians who campaigned on the promise of bringing about the end of the recession and long-term economic growth. This has been noticed by commentators, who have suggested that the OFR has been plagued by a number of issues (some internal, many external), ranging from a lack of cohesion amongst regulatory agencies, the lack of discipline that the FSOC can administer, and a reluctance on behalf of the OFR to issue subpoenas.

Yet, it has also been suggested that the OFR has been doomed to fail by the interference from politicians. Reuters reports that the OFR has been under pressure for many years from Republican congressmen and women, who claim that the Office is ‘unproductive, unnecessary, and another form of intrusive government bureaucracy’. According to the Financial Times, Steven Mnuchin (who we know from previous posts) has taken a direct aim at the office, insisting that the Treasury Department take over the OFR’s staffing and budgetary decisions. The fact that the OFR sits within the Treasury is one major problem, and the fact that the OFR is supposed to be autonomous is clearly another problem. Yet, that has not stopped the Trump administration, who have recently announced that the OFR will have its budget cut by 25% to around $76 million, and will see up to 40 positions obliterated– in 2016 there were 208 members of staff, but that is an ever-dwindling number. The Treasury maintains that it is taking such actions to ‘make OFR a more efficient organisation with a stronger workforce and culture to better execute its mission’, but the suggestion from elsewhere is that ‘rather than strengthening the OFR, the Trump administration is undermining it… this is shortsighted’. It is worth noting that it is not just the Treasury taking aim at the OFR, as the SEC took action in 2013 by declaring that some of its reports ‘were too strong in [their] depiction of the industry’s risks’.

Here in Financial Regulation Matters we know full well that there will always be a sharpened opposition to risk-aversion because, essentially, being risk-averse is not profitable. It was reported recently that the banking industry is increasing its lobbying efforts to repeal certain banking laws in the U.S. that will enable them to free themselves from certain capital ratio requirements (the so-called G-SIB Surcharge), and this is not surprising. However, it is relevant to paint a picture of both the desire to free the industry from crisis-era restraints, and also the public body support for that to come to reality. Donald Trump vowed to cut back governmental red-tape throughout his Presidential campaign, and he is doing just that. Perhaps that is fair — he is doing what he said he would do — but the reality is that these calls were made under a false pretence. On many occasions he stated that there was a requirement to cut the red tape to create jobs in the U.S., and in some cases that may come to fruition. But an associated reality that he rarely mentioned when campaigning for office is that this approach disproportionately benefits and emboldens the rich, with particular reference to the financial powerhouses that tower over American, and many other societies. We know that after his massive tax cuts for the rich he proudly declared that he had ‘made his friends rich’, and developments such as these with respect to the OFR only further that cause.

Essentially, we are beginning to move through the certain ‘phases’ which can be traced back for a large number of years. The calls by financial institutions to be freed from restraint, in order to grow and ‘provide jobs’, is not heeded after a crash. However, those calls never stop, and it is institutional support from the state that advances the ‘phases’ so that these calls start developing momentum. Any rational person would surely suggest that, for what is quite a limited budget anyway, the OFR should be supported further so that, once the financial institutions begin to make more moves in the marketplace, the regulators tasked with regulating their activities are provided with as much information as possible. The logical chain of events is that the financial institutions are allowed to take more risk but from within the informed and progressive regulatory arena which monitors and regulates the systemic risk being taken. Yet, there is a push to do exactly the opposite, with politicians now queuing up (on the bank of increased lobbying efforts) to severely damage that regulatory arena. The reason is simple, and it is not related to ‘growth’ or ‘jobs’ — the ‘excess’ that is required to be made to make certain people rich cannot be developed within that regulatory arena. A solid regulatory arena can allow for the development of ‘growth’ and ‘jobs’, but does so within a confined, sustainable, and systemically-safe manner; none of those attributes contribute to the development of excess, and it is that excess that allows Donald Trump and his ‘friends’ to continue their dominance. The cuts to the OFR merely represent just one small strand in what is an ever-unwinding regulatory tapestry. The question then is, and this is a question we have asked a number of times, is a decade of ‘recovery’ enough to provide societal stability if another crash takes hold?

Keywords — Office of Financial Research, Trump, USA, Treasury, Business, Regulatory Amnesia, @finregmatters