Clinton pledges regulatory overhaul of US financial markets

Aspiring 45th US President talks tough on Wall Street “bad behaviour” and risks of “shadow banking” system

Key areas of the US finance industry that are central to treasurers’ work are in the regulatory sights of Presidential hopeful Hillary Clinton, with the release of a policy paper outlining how she would tackle risks in the sector.

In the document, published on 8 October, Clinton homed in on a range of activities carried out by what she defined as the “shadow banking” system – in other words, non-bank intermediaries responsible for the transition and management of cash and financial products.

As the document says, Clinton is aiming to secure “more transparency in the shadow-banking sector, a better understanding of the risks it poses, and stronger tools to tackle those risks”.

With that in mind, she proposes to:

  • Enhance transparency requirements for exchange-traded products, to gain a better assessment of underlying liquidity, leverage and market risks
  • Impose, along with other world financial centres, a set of margin and collateral rules on repurchase agreements (or repos) and other securities-financing transactions, which she cited as “risky forms of short-term borrowing that played a key role in the onset of the financial crisis”
  • Improve public disclosure requirements for repos, so that both regulators and participants can more fully understand the associated risks
  • Strengthen leverage restrictions and liquidity requirements for broker-dealers, which she said also contributed to the crisis
  • Review regulations in the money market fund industry, which she said “suffered a massive and destabilising run after the failure of Lehman Brothers that was quelled only by a taxpayer guarantee”

At a 6 October campaign meeting in Iowa, Clinton heralded the policy paper by telling her audience: “I’m going to go after risk. Sometimes risk is associated with bigness of a bank, sometimes risk can be an insurance company; sometimes risk can be in the shadow banking system. We also have to do more to hold individuals accountable for their bad behaviour.”

Her approach has raised eyebrows among observers of the overlap between finance and politics – not least because her husband, former US President Bill Clinton, is widely regarded as a force for significant deregulation during his tenure.

For example, his administration had enthusiastically championed the Gramm-Leach-Bliley Act: a law that repealed a vital part of the 1933 Glass-Steagal Act, passed under Franklin D Roosevelt, which had erected barriers between banks’ commercial, investment and insurance wings. Mr Clinton’s warm welcome of its enactment can still be found online.

Further to those questions over her husband’s financial policies, pundits have also noted that, as a former New York senator, Mrs Clinton still has strong links to senior Wall Street figures – some of whom are funding her Presidential campaign.

One leading finance thinker who was left unconvinced by Clinton’s proposals is University of Connecticut School of Law associate professor James Kwak – co-founder of influential economics blog The Baseline Scenario.

In a post on the blog, Kwak pointed out that Clinton “has no choice but to try to appear tough” on Wall Street’s kingpins, “but she has to do that without simply jettisoning 25 years of ‘New Democrat’ friendliness to business and without alienating the financial industry donors she is counting on.

“Unfortunately,” he added, “it’s just more of the same: another two-dozen or so regulatory tweaks, mainly of the arcane variety, that will produce more of the massive, loophole-ridden rules that Dodd-Frank gave us.”

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