Drucker: What the US presidential candidates are saying on financial regulation

Vanessa Drucker 160 byline

When Mitt Romney debated Barack Obama on 3 October, he was asked point blank about his earlier pledges to repeal Dodd-Frank, the law that overhauled the American financial sector. Romney had previously vowed to obliterate the legislation, promising at an August fundraiser, “to get rid of Dodd-Frank and go back and look at regulation piece by piece”.

This October he sounded less definitive, conceding: “You have to have regulation and there are some parts of Dodd-Frank that make all the sense in the world… but I would not designate five banks as too big to fail. This is the biggest kiss that’s being given to New York banks.”

Perhaps he recognizes that the public is still smarting from the financial crisis, and has no desire to return to the laisser faire, highly leveraged heyday of 2008. In past weeks, as presidential candidates typically do, he has shifted from more strident positions toward the center.

But Federal Reserve governor Daniel Tarullo was taking note. Last week, Tarullo came out with a concrete proposal for whittling down those five TBTF giants. Tarullo, who oversees the banking sector’s stress tests, and oposes light touch regulation, suggested limiting banks’ non-deposit liabilities to some unspecified percentage of GDP. That move would mean restricting their sources of cheap funding outside of bank deposits. The concept is appealing, as it neatly aligns banking and economic growth. The idea, however, is not entirely new. Simon Johnson suggested it in 2009, although he too could not pinpoint the suitable percentage of GDP to apply.

Returning to governor Romney, it is improbable that he would encourage anything like Tarullo’s plan. Tarullo, a Democrat appointed by President Obama, has often advocated stricter banking regulation. Romney’s campaign has been overwhelmingly financed by Wall Street money, and his top five contributors are Goldman Sachs, JP Morgan, Morgan Stanley, Bank of America and Credit Suisse. (Obama’s represent a different crew: the University of California, Microsoft, Google, DLA Piper and Harvard University.) Wall Street would like to say goodbye to bans on prop trading, consumer protection rules and many other Dodd-Frank restrictions. Despite his TBTF rhetoric, it’s unlikely that Romney would be eager to bite that hand that fed him.

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Vanessa Drucker is the American Editor of Fund Strategy, based in New York City.  She has worked as a financial journalist for 20 years. In the 1980s, she practiced banking and securities law on Wall Street, and is the author of two business novels. Vanessa can be contacted at vanessa.drucker@centaur.co.uk.