(Washington) — With the inauguration of the new administration near, uncertainty lingers about whether bank regulators' various efforts to improve culture at the biggest banks will clash with the pro-growth, deregulatory agenda that Republicans envision.
"On the one hand, it is clear that the future administration doesn't have much affection for regulation," said Tamar Frankel, a law professor at Boston University. "On the other hand, it also does not want to support [banks] with government or with national funds. Banks are expensive when they fail."
The differences between President-elect Donald Trump and President Obama are numerous, but both share disgust with the kinds of irresponsible behavior that led to the 2008 financial crisis and the government bailouts that the crisis prompted. Trump campaigned as an outsider not beholden to the financial industry. And the financial crisis was the moral backdrop of the Obama administration and represented the political justification for much of its policies and goals — particularly the Dodd-Frank Act.
But reforming the internal culture of a bank from the outside isn't easy. Bank regulators have made various attempts to address the issue with the tools they have, including with regulations, conferences and enforcement actions.
Federal Reserve Chair Janet Yellen earlier this month defended the Obama administration's response to that crisis and Dodd-Frank, and the big banks themselves said in December that the concept of "too big to fail" was effectively over. But Yellen acknowledged that the seemingly endless parade of scandals involving the banking industry shows that "there is room for improvement."
It isn't clear that the nascent Trump administration feels the same way. Members of his transition team have tended to emphasize the importance of rolling back Dodd-Frank and increasing economic growth rather than curbing the failings of the banking industry. But other Republicans in Congress — notably House Financial Services Committee Chairman Jeb Hensarling, R-Texas — have criticized the Obama administration for failing to follow the crisis with criminal prosecutions.
So while the incoming administration's approach may change, few believe that the issue will go away entirely. Karen Shaw Petrou, managing partner with Federal Financial Analytics, said scandals involving the banking industry have a way of making the question of bank culture difficult for regulators to ignore. And while the administration may be changing on Jan. 21, the bank regulators largely are not.
"Something always comes up that turns out to be damn handy if you want to make a point about bank culture," Petrou said. "Secondly, this is a regulatory call. Things will change slowly through 2017 unless or until we have a new Fed vice chairman for supervision … and even then you're going to have pretty much the same Fed through the first half of the year, you're going to have the same comptroller through about the first half of the year, you're going to have the same Federal Reserve Bank of New York for a while, and the same FDIC for a while."
Aaron Klein, policy director of the Center on Regulation and Markets at the Brookings Institution, said that the Trump administration can't just sweep bank misdeeds under the rug even when its nominees are in place among the banking regulators. Scandals have a way of setting the agenda, he said.
"Even if responding to concerns about bank culture isn't in the prospective [agenda], the next scandal that involves a breakdown of cultural norms and ethics will prompt a new look at bank culture and ethics," Klein said.
Arthur Wilmarth, a professor of law at George Washington University and consultant for the 2010 congressional inquiry into the financial crisis, said the fact that no high-level financial executives were held personally accountable for the 2008 crisis is a big part of why recent scandals — most notably the Wells Fargo fiasco — still pack a punch.
"Until senior executives are really held accountable in a meaningful way — I mean significant financial penalties, industry bars, things that really hurt their pocketbook and hurt their reputation — any preaching about culture really would have a pretty muted impact," Wilmarth said. "People felt like no one was really hurt that badly, even when they ran places that had horrifically dysfunctional and toxic cultures."
Wayne Abernathy, senior vice president of regulatory affairs at the American Bankers Association, said that enforcing culture from a regulatory standpoint is challenging — so much so that he says it may not be possible to do so legally. But influencing culture from a supervisory standpoint is possible, and there is reason for banks to expect that the new administration will approach them on a more collaborative footing than the Obama administration did.
"The concept of culture as a supervisory approach is something that I think is pretty ingrained — I don't see that as something that is turning around, and I think banks buy into that," Abernathy said. "Where there is pushback is where culture seems to be used by policymakers to exert their will beyond what the rules are — to get banks to take up the preferences of the policymaker that the policymaker has been unwilling to spell out in any kind of detail. That concept of culture will disappear in the new administration."
Frankel said it is also expecting a lot to think that the Trump administration will take a proactive stance toward regulating the banking industry, and even if it did, the kinds of reforms that are necessary would have to arise organically, within the institutions themselves. For that to happen, she said, the banks have to see that there is a cost to excessive risk-taking or other imprudence, and for that to take hold customers have to vote with their feet.
"We cannot anymore either give backup or give directions to large institutions — it simply doesn't work," Frankel said. "Unless the institutions have culture inside, it won't work."
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