Deregulation to make a return under Trump?
In nearly a decade since the Global Financial Crisis, much of the regulatory landscape has changed. The U.S. passed the Dodd-Frank Act while the EU enacted over 40 different laws to tighten regulations. Still, the process is vast – the Dodd-Frank act contains 2,300 pages – and several details remain to be worked out on top of broader laws.
Consequently, many pieces of the regulatory puzzle still remain in the pipeline – with huge consequences. For example, about $850 billion exited Prime money market funds this summer in response to new SEC money market rules, leading also to a rise in 12-month U.S. LIBOR, HSBC pointed out in a research note focusing on compliance tightening.
Trump may trigger deregulation in the U.S.
While the installation of Republican Donald Trump in the White House early next year raise hopes of deregulation in the U.S., Europe remains under a cloud, thanks to Brexit, the Financial Transaction Tax and new leveraged lending guidelines amid expectations of continued support for regulation.
Notwithstanding Trump’s stand on financial deregulation, HSBC views any policy under Trump as uncertain, especially a contentious one as the “wholesale repeal of Dodd-Frank.” But Republicans’ total control of both houses of Congress and the White House, and the fact that Dodd-Frank was passed without a single Republican vote suggest “the direction of travel is likely to be deregulation,” the bank said.
In contrast, even though there has been a change in “mood music” Europe is still witnessing only a push for “more proportionate regulation” – not deregulation itself.
“While the original proposal cannot really be implemented – sovereign bonds are a red line for Italy – we caution that plans for an FTT have not been abandoned and continue to be discussed by 10 of the 11 states,” HSBC warned. “With French and German elections next year, we think there is pressure to announce something. We think an agreement to tax equity and derivative transactions is possible, even if implementation is difficult and the extra-territorial effects are contentious.”
“Indeed an FTT could be announced along with the Capital Markets Union, sold as a way of discouraging short-term speculation and encouraging long-term investment,” the bank added.
The original FTT proposal sought to tax both buyers and sellers of equity, fixed income and derivatives if at least one counterparty was based in one of the 11 states, or if the instrument was issued in one of the 11 states.
On Brexit, much would depend on the final agreement between the UK and the EU, but UK banks would “likely have to continue to comply with much EU regulation,” the bank said. Also, it would take over two years to play out from the time the U.K. triggers Article 50 to secede the EU.
New year-end leveraged lending guidelines for banks under the Single Supervisory Mechanism – expected by Fitch to be announced by the ECB before the year-end – could add to the difficulties.
The mechanism is broadly consistent with the U.S. guidelines already in effect but European corporates are more dependent on loans than their U.S. counterparts, said HSBC. At the end of 2015, bonds only accounted for 12% of funding for nonfinancial corporates in the eurozone, versus 68% in the U.S., it said.
In the end, HSBC is counting on the ECB’s repeated “willingness to be pragmatic.”