With the U.S. presidential election days away, we are breaking down the views that each candidate has on regulation and, ultimately, the impact their presidencies might have on credit quality.
First let’s establish the linkage between regulation and credit quality. Most notably, from a credit perspective, how does regulation impact the Systemic Risk within the United States? We define Systemic Risk as the risk of collapse of an entire financial system or entire market.
Since the Great Recession in 2008, regulatory legislation such as the Dodd-Frank Act has lowered the Systemic Risk in the United States. A good example of this effect is the Volcker Rule, which limits banks from risky derivatives-based investments using their own funds. Let’s caution that there are many inter-linkages with regulation. For example, while, in some cases, Systemic Risk might be lower, which should seemingly further protect our economy, those regulations might actually have a drag effect both on the ability of banks to lend and also on their profitability.
Let’s take a look at the candidate’s views:
According to published reports*, the Trump campaign proposes the following:
- Putting a freeze on any new federal regulation proposals.
- Requiring regulators to rank all regulations and cut the least important ones.
- Propose that “Dodd-Frank has to be eliminated or greatly changed.”
Based on these assertions, if Mr. Trump is elected, we intend to focus our future analysis on how a Trump administration would alter the Dodd-Frank Act. On the surface, there would likely be a potential for heightened Systemic Risk, for example, if safeguards that limit banks’ risky behavior are removed. However, if those safeguards remain in place and bank compliance costs are lowered, that could free up capital, increase lending, help bank profitability and possibly provide a more macro-economic benefit. In short, for a Trump Administration, we would look in the future at the specificity of the proposed changes to the Dodd-Frank Act to determine the ultimate impact on Systemic Risk and, thus, credit quality.
According to published reports*, the Clinton campaign proposes to do the following:
- Further discourage risky investment and lending behavior for the largest banks.
- Incentivize banks to shrink and simplify.
- Empower regulators to break up financial institutions that are viewed as too big and too risky.
In contrast to the Trump campaign, the Clinton camp has signaled their intent to strengthen Dodd-Frank, especially for the largest financial institutions that pose the greatest Systemic Risk. So our analysis is more straightforward and predicable. A Clinton Administration would likely add to the Dodd-Frank Act, continuing the trend of lowering Systemic Risk in the United States. Our future analysis will focus on gauging the impact that any changes to Dodd-Frank would have on the largest banks and determine the decrease or increase in economic risk posed by tighter banking regulation.Over the next few months, S&P Global Market Intelligence and the Risk Insight Series will be closely monitoring the new administration’s actions to introduce or modify regulation – most notably the Dodd-Frank Act – and the impact that the new administration will have on overall credit quality in the US and globally.
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*Jain, Surbhi. "Clinton Seeks More Regulation, Trump Wants to Eliminate 70% of It." Market Realist. N.p., 10 Oct. 2016. Web. 26 Oct. 2016.