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The pit-bull and the pendulum

Gary Cohn promises to liberate the banking sector from tiresome regulations - as President Trump has asked him to do. But will this renown “attack dog’s” slashing red tape be an overreaction to the over regulation that was an overreaction to the last financial crisis or are these the stirrings of a financial services trade war?

Every time there is a financial crash regulators rush to produce a new sheaf of "never again" regulations to prevent a repetition. The fact that financial crises are repeated repeatedly is compelling evidence that regulators are as good at regulating as they alleged bankers are at banking.

A regulatory blizzard including, not only, the Frank-Dodd Act, a Single EU banking rulebook, Basel III and a host of other measures were supposedly the answer to the financial crash of 2008. Is Mr. Cohn’s proposed assault on Frank-Dodd going to swing the pendulum back to the lax rules that supposedly triggered that crash?

Mario Draghi, head of the European Central Bank and, like Mr. Cohn, a Goldman Sachs alumnus, is not so sure. He told the European Parliament recently that it was thanks to supervisors that financial risk had been reduced since the crash.

Frank-Dodd Dead?

The Frank-Dodd Act is seen by the likes of Mr. Cohn as an overreaction to the financial crisis in 2008 and regulatory and cost burden on banks (particularly the large banks who see him as their cheerleader). But Mr. Draghi, told the European Parliament, "The last thing we need is a relaxation of regulation… The idea of repeating the conditions of before the crisis is very worrisome."

Glass-Steagall cracked

Who is right? After all, the enfeeblement of the Glass-Steagall Act, creating homoeopathic dilutions of regulation, and the financial lifeboat launched for Long Term Capital Management in 1998 were both seen as contributing to attitudes to risk that laid the ground for the 2008 crash. Do we run the risk of the risk pendulum, which had swung too far in the direction of liberalisation before 2008 and too far towards rigid regulation post-2008 will swing yet again this time slicing through bundles of red tape (as Mr. Cohn sees it)?

Or is this part of a coming trade war in services between the US and the EU that will be waged with weapons of regulatory attrition and cutting the cost of regulation while increasing risk?

After all the EU Commission is planning to ease the restrictions on securitisation. They feel they are recognising the muscle in their re-regulation was an overreaction to the crash of 2008 that was, at the time, partly blamed on securitisation activity.

By relaxing those regulations the EU feel they can improve European banks’ capacity for lending to businesses and households allowing banks to use securitisation to free capacity for expanding loans.

Conditions of regulatory arbitrage are being created that will create competition that will allow international borrowers to cherry pick the price and the regulatory regime to which they wish to be subject.

Time will tell if the wheels of finance are being oiled or whether, as Mr. Draghi suggests, we face déjà vu all over, all over, again, again.

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