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Conference Presentation, Panel, Fireside Chat

Stability vs. Growth: Unintended Consequences of Post-Crisis Financial Regulations

Milken InstituteKadhim Shubber, Jiří Król, Brent McIntosh, Scott O'Malia, Michael Piwowar
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Panel Overview & Core Participants

  • Event: Milken Institute's London Summit panel on "Stability and Growth and the Unintended Consequences of Post-Crisis Financial Regulations."
  • Moderator: Kadim Shuber, Journalist, Financial Times.
  • Panelists:
    • Scott O'Malia, CEO, International Swaps and Derivatives Association (ISDA).
    • Yuri Kroll, Deputy CEO, Alternative Investment Management Association (AIMA).
    • Brent McIntosh, General Counsel, U.S. Department of the Treasury.
    • Michael Pivovar, Executive Director, Center for Financial Markets, Milken Institute.

System Safety & Regulatory Progress (The "Gains")

  • Capital Resilience: U.S. bank balance sheets are supported by $1.9 trillion in Tier 1 capital, significantly increasing system resilience since the 2008 crisis.
  • Clearing Mandates: 80% to 90% of interest rate trades are now cleared, up from near zero pre-crisis, reducing bilateral counterparty risk.
  • Margin Requirements: Nearly $1 trillion in variation margin now backs non-cleared trades, with initial margin rules implemented starting in 2016.
  • Data Transparency: Regulatory agencies (SEC, CFTC) now collect comprehensive data on swaps transactions, addressing the pre-crisis "lack of transparency" that hindered crisis response.
  • Scope of Rules: Post-crisis reforms mandated regulatory reporting across over 15 jurisdictions, though consistency remains a challenge.

Unintended Consequences & Economic Costs

  • Regulatory Fragmentation: Inconsistent rules across jurisdictions create friction, preventing the efficiency of cross-border harmonization and forcing firms to comply with differing local standards.
  • Compliance Burden: The Dodd-Frank Act (2,319 pages) triggered a "death march" of 400+ new rules, diverting regulatory bandwidth from other priorities like investor protection and capital formation.
  • Capital Formation Drag:
    • The number of public U.S. companies is roughly half of what it was 20 years ago due to high compliance costs.
    • Foreign companies are choosing not to list in the U.S. due to the cost and complexity of going public.
  • One-Size-Fits-All Risks: Enhanced prudential standards applied to regional banks (notably in the 2019 Economic Growth Act adjustments) were deemed by regulators to offer little benefit relative to the cost imposed.
  • Opportunity Costs: Regulators spend significant time on statutory mandates (e.g., annual SEC reviews of eight specific credit rating agency areas) rather than addressing emerging, higher-priority risks.
  • Consumer Credit Impact: Strict regulations have inadvertently reduced the availability of consumer credit to small businesses in certain contexts.

Specific Regulatory Critiques & Recommendations

  • Over-Clearing Risks: Pushing too many trades into central clearing houses (CCPs) risks creating "too-big-to-fail" institutions within the clearing system itself.
  • FSOC Evolution: The Financial Stability Oversight Council (FSOC) has shifted from entity-specific designations (e.g., designating AIG) to focusing on activities and systemic threats, with Treasury viewing the old approach as ineffective.
  • Jurisdictional Conflicts:
    • MiFID II: Regarded by panelists as excessively prescriptive, potentially stifling competition and capital formation in Europe, with unresolved issues regarding regulatory arbitrage.
    • Brexit & LCH: A hard Brexit could force the fragmentation of the London Clearing House (LCH), which handles 90% of interest rate products, creating inefficiency and higher costs for pension funds.
    • U.S. Definition Gaps: Conflicting definitions of "swap dealer" and "US person" between prudential regulators (banking) and market regulators (SEC/CFTC) create compliance chaos.
  • European Capital Markets: Europe's reliance on banking finance versus U.S. reliance on capital markets (direct lending/bonds) has led to uneven growth; a functional Capital Markets Union is deemed essential for EU growth.

Deregulatory Initiatives & Future Outlook

  • Executive Orders: The Trump administration's "two-for-one" executive order prompted the review of thousands of regulations, resulting in the removal of ~300 rules that were legally obsolete or created deadweight losses.
  • Regulatory Hygiene: New Treasury mechanisms require rigorous cost-benefit analysis for all new rules, with internal committees rejecting regulations that do not justify their economic costs.
  • FinTech & Innovation:
    • Regulators (SEC, CFTC, FDIC, FCA) are establishing "Offices of Innovation" to embrace technology like AI and machine learning for compliance (RegTech).
    • Industry is shifting from hiring solely for compliance to developing proprietary data solutions to standardize trade life cycles and reduce bespoke burdens.
  • Small Entity Relief: Recent guidance allows smaller banks to share Anti-Money Laundering (AML) resources and officers, mitigating the disproportionate burden of fixed compliance costs on smaller firms.
  • Global Harmonization: There is an urgent need to move from 75% alignment to full cross-border recognition of rules (e.g., substitutive compliance for MiFID II) to prevent capital flight and market fragmentation.
  • Human Capital Trends: While compliance hiring has increased, the "best and brightest" are gravitating toward FinTech startups and Big Tech rather than traditional regulated financial institutions, forcing incumbents to innovate internally to survive.

Key Disagreements & Tensions

  • Regulatory zeal: A disagreement exists regarding whether the shift in FSOC focus represents a strategic reallocation of resources or a "power grab" to expand regulatory authority.
  • Safety vs. Growth: Tension remains between maintaining "safety at all costs" (which can stifle growth) versus optimizing rules to ensure capital flows to emerging markets (e.g., $1.7 trillion investment need in Asia).
  • Judicial Review: The U.S. system allows private parties to challenge regulations in court, acting as a check on agency overreach; panelists noted this check is largely absent in the EU regulatory framework.
  • Data Sharing: Despite G20 goals for data alignment, regulators in different jurisdictions often do not share information, preventing a truly global view of risk.