It Ain't Quite That Simple ...

When I was a pimply kid studying for my BS in business at City University, London the school decided to bring in some external ‘talent’ to liven things up. The theory was that us callow youths might respond better to an industry expert and manage sufficient enthusiasm to be out of our sacks and in a 9am lecture on economics, systems science or God-knows what else on time. The guest industry star lecturer for my marketing module turned out to be a rather easy-on-the-eye, sassy 30-something year old called Dr X. Needless to say, when she sashayed in each Tuesday morning even the more lethargic boys in the class suddenly perked up and attendance was never again an issue for that particular course. One of the many things the delightful Dr X. taught me in that long-ago, heady 3 month term was something to do with ‘barriers to market entry'. This all came rushing back to me again this week as I read more and more about our President-elect’s increasingly confused plans (or lack thereof) for Dodd-Frank and its possible replacement The Financial CHOICE Act. (I don’t know why CHOICE is capitalized – I assume that it’s probably based on some witty acronym of which the US Congress is so fond). In looking up ‘barriers to entry’ I also reprised the Five Ps which in Dr X’s world meant ‘Product, Price, Placement, Promotion and People’. In my world the Five Ps mean – ‘Planning Prevents Piss Poor Performance’. Pay attention Trump – all of this stuff could prove useful.

The issue is this; having burned zillions of dollars over the last few years hiring compliance wonks, buying new systems and paying consultants like me to help them, the big banks are now finally, pretty well compliant with Dodd-Frank. They hated it as first, fought it tooth and nail. They hired lobbyists and bitched and moaned – though never in public. They didn’t dare after 2008 when several went bust and the rest got tax payer money to stay in business. Yet the writing was on the wall and in came the new law. Now it’s in place and working they have discovered among other things what the delightful Dr X. taught me many years ago – it provides a wonderful barrier to entry to Johnny Foreign Bank or any sweaty regional upstart even considering challenging the big boys in their home patch. In other words a neat little regulatory cartel has been formed. Just like railroads 150 years ago and healthcare any-time, ever. So, while this means that certain profit avenues are either closed off (proprietary trading and hedge fund ownership under the Volcker rules, for example) or simply capped in value – everything else. It also means that they now sit alone on a big, fertile plain of financial stability quietly making money while battalions of lawyers defend the borders ready to deploy the 1,000 page Dodd-Frank Act heavy artillery at a moment’s notice.

Today those banks are defending Dodd-Frank as a pillar of financial stability in the US and globally. So what to do? As you can see these issues are never simple and the Law of Unintended Consequence rules over every seeming sensible decision at every point. Repeal of Dodd-Frank would open a window to the cold winds of competition and change. Arguably always a good thing in the medium term for the customer and the economy. Yet it may also risk some of the hard won stability that the banking sector now seems to enjoy. US Senator Chuck Schumer of New York has vowed to keep Dodd-Frank intact. And despite being a Democrat he’s apparently a close buddy of President-elect Trump. And in case you think our erstwhile President has made up his mind on this issue – or indeed anything – you may need to re-watch last week’s SNL sketch to understand the complexities, gravitas and subtleties of the decision making process currently taking place in the Trump team.

The small print: this article is entirely the author’s personal opinion and is in no way representative of the views of any current or past employer or client.

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