The Balancing Act: Supporting A Resilient Financial System

“When you think about clients, we’re talking about regulation in financial services [but] there’s regulatory impact on businesses everywhere. As I travel around and I talk to clients – talking to clients in the healthcare space, talking to clients in the energy space – you can get around to all different industries and everybody feels the impact of regulation.”

David M. Solomon
President and Co-Chief Operating Officer, Goldman Sachs & Co.
SIFMA’s 2017 Annual Meeting, The Capital Markets Conference

The capital markets form the bedrock of our nation’s economy – connecting savers and capital to the best innovators, ideas and enterprises. These relationships enable businesses to grow and create jobs, workers to save for retirement, families to pay for education and communities to finance infrastructure development. When markets are thrown off-kilter, the knock-on effects ripple through our financial institutions and then outward to clients, investors, and the economy at large.

Ten years post the financial crisis, the U.S. has implemented hundreds of regulations supplementing an already expansive and complex regulatory framework. While many rules have provided for investor confidence and financial stability, redundant and conflicting rules have resulted in stifled economic growth. At SIFMA’s 2017 Annual Meeting, The Capital Markets Conference, experts explored how this imbalance is causing the U.S. economy to experience the slowest economic recovery of the post-war period:

  • Private credit extended to households and nonfinancial businesses has grown at a slower pace than in all recoveries in the past 60 years – particularly impacting small businesses.
  • Fewer firms are going public. There were an average of 282 IPOs per year from 1976 to 2000, and since then there have been an average of 114 per year.
  • Bond markets have become significantly less liquid in recent years, as banking organizations have significantly reduced inventories of U.S. Treasuries and of corporate debt in response to new regulations.  

Warren A. Stephens, Chairman, President and Chief Executive Officer, Stephens Inc. and Lisa Kidd Hunt, Executive Vice President, International Services and Special Business Development, Charles Schwab & Co., Inc. and 2018 SIFMA Chair, at SIFMA’s 2017 Annual Meeting, The Capital Markets Conference.

It’s time to take a look back now, with institutions extremely well-capitalized and markets secure, and complete a comprehensive review of the U.S. financial regulatory framework. What regulations have contributed to safer and more resilient markets? Where have they gone awry? What might be holding back economic growth, capital formation and economic opportunity?

“There’s no silver bullet that’s going to solve the problem,” said Solomon. “Policymakers have to be focused on the things that they can control, and can impact, and promote growth… tax reform, making the U.S. more competitive, getting the right balance from a regulatory perspective, those are things that certainly can contribute to economic growth.”

Under Secretary Mnuchin, the U.S. Department of the Treasury has been working diligently to conduct a thorough review of our financial regulatory system. To date, they have released three reports on the Administration’s Core Principles of Financial Regulation (Economic Growth; Capital Markets Regulation; and Asset Management). During his remarks, Craig Phillips, Counselor to the Secretary, U.S. Department of the Treasury, said the reports “can better the banking system to drive economic growth and promote job creation.”

“In terms of framing the debate, [the reports] are fantastic,” said Jay Clayton, Chairman of the U.S. Securities and Exchange Commission. “I think it’s a very constructive way to go about looking at where regulations should go in this space.”

Jay Clayton, Chairman, U.S. Securities and Exchange Commission, and Timothy C. Scheve, President & CEO, Janney Montgomery Scott, LLC and 2017 SIFMA Chair,at SIFMA’s 2017 Annual Meeting, The Capital Markets Conference.

Rather than focusing on sweeping change, the reports identify specific issues that can be addressed to allow capital to move freely and promote growth and investment while maintaining the original intent of regulatory reform. Warren Stephens, Chairman, President and Chief Executive Officer of Stephens Inc. urged policymakers and regulators to bear in mind that “one size of regulation does not fit all.”

Both the industry and regulators are committed to finding the right calibration to ensure there is an appropriate balance between the economic opportunity and financial stability. This collaboration is key. And, while we might not be able to predict the next market downturn, a well-regulated financial sector must ensure the safety and soundness of the financial system and the protection of investors.

See Also:

Ira D. Hammerman is the Executive Vice President and General Counsel at SIFMA