Markets In Action

The Challenge of Balancing Financial System Regulation and Economic Growth

It’s been nearly a decade since the 2008 financial and nearly seven years after the U.S. Congress passed the Dodd-Frank package of financial regulations in response to that crisis. Policymakers and experts are assessing the landscape to determine, did we get the balance right?

That was the key question participants explored in a May 25 morning symposium at the Bipartisan Policy Center (BPC) in Washington D.C., focused on “Regulating the Financial System During the Trump Administration.”

The White House has signaled openness to new approaches to regulation. In a February 3 executive order, President Trump laid out seven “core principles” for financial system regulation, and tasked the Treasury Department with preparing a report detailing how effectively the current system corresponds to those guiding principles.

Two expert panelists at the May 25 BPC event—Kenneth E. Bentsen, Jr., president and CEO of the Securities Industry and Financial Markets Association (SIFMA), and Michael S. Barr, former assistant secretary for financial institutions in the Obama Treasury Department, discussed the current state of financial regulation in the United States—agreed that it’s appropriate for policymakers to assess the current state of financial regulation.

‘A work in progress’

Bentsen likened the recent state of financial regulation to a team of doctors injecting an ailing patient with an array of treatments, arguing that “maybe we should step back and see how the patient is doing.”

He pointed out that many of the elements of the Dodd-Frank package were welcomed by the financial industry to make the financial system and capital markets stronger and more resilient. Bentsen added that growth in the U.S. markets and economy accelerated more quickly than in other countries owing to the depth of the U.S. capital markets.

But he also pointed to a variety of key metrics that have not yet fully recovered since the recession’s end in 2009—loan growth, liquidity in bond markets, initial public offerings, sluggish entrepreneurship—to suggest that revisiting some aspects of the regulatory system is in order. It means ensuring the rules are coherent and not creating unintended consequences as a result of a negative additive effect.

“All of that points to a time to step back and take look [at how the system is working] from a position of strength,” Bentsen said. “Let’s look at the coherence of all these rules we’ve put into place and how they’re working together…. Do we have the right coherence and the right calibration?”

Barr, now a law professor at the University of Michigan School of Law, agreed that financial regulation is “a work in progress,” but cautioned against going too far in revising the existing structures.

He emphasized the need to ensure that any regulation of financial system should set a high priority on market stability, fairness and protecting investors and consumers—priorities, he said, that can co-exist with a vigorous market and a strong economy. “I think you can have both a safer and a fairer system and economic growth.”

Confirmation woes

Bentsen and Barr noted the slow pace of Senate confirmations as a challenge to the effectiveness of regulatory agencies.

Barr pointed to his own experience working at Treasury to illustrate how executive branch appointees and career staff must work together to design and implement effective policy.

“The institution needs senior leadership to function” at all levels, he explained. “If the new administration wants to significantly affect policy, they need to have their nominees in place. Not having confirmed people is a real problem for the country.”

His remarks echoed a March 2017 BPC study of confirmations finding “that length of the nominations process has more than tripled since the late 1980s, and that has led to agencies routinely being understaffed at the leadership level.”

“The effectiveness of the financial regulatory system is predicated on having high-quality financial regulators in place,” the BPC study said. “The recent financial crisis and ensuing recession demonstrate the ramifications when that financial regulatory system fails. Fixing the nominations process is easier than developing perfect financial regulation. The president and the Senate should commit to ensuring that vacancies are filled in a timely manner. History shows that they can.”

Innovation and the challenge of regulation

Bentsen pointed out that innovation in the financial industry and capital markets over the last few decades has brought significant benefits to investors and consumers, particularly in the form of lower costs.

At the same time, Bentsen suggested policymakers should take concerns seriously when addressing financial regulation to ensure confidence in the system.

Barr emphasized that “financial sector innovation… is absolutely central to growth,” but that same innovation is likely to bring greater risks as regulators struggle to keep up with changing technologies, products and services. He encouraged policymakers to find common ground with industry leaders and consumer advocates on key issues like financial data privacy and anti-money laundering rules.

The quest for growth

One shared concern for all the participants was the importance of boosting economic growth. The event’s keynote speaker was, Mark Calabria, chief economist in the office of Vice President Mike Pence, who spoke before the panel to highlight the Trump administration’s economic priorities.

Calabria emphasized that the administration’s principal goals are to boost productivity growth and improve labor force participation, two key metrics he said are essential to boosting overall growth in the economy.

Bentsen noted that the Trump team faces a different challenge than did the Obama administration in its initial phases. When Obama entered office in 2009, the focus was on addressing the aftermath of the financial crisis and steering the country out of recession.



For the full video of the “Regulating the Financial System During the Trump Administration” event, check out the BPC website.  


*Photo courtesy of Bipartisan Policy Center