The toxic politicisation of financial regulation

With the UK and the US in full-on electioneering mode over the coming months, we can expect plenty of noise about push-button voter issues: the cost of living, immigration and a familiar range of “culture-war” topics.

But in among the talk of cutting taxes, and stopping boats and border crossings, you may also find senior party figures, even the leadership contenders, broaching the more rarefied subjects of financial regulation and central banking.

One of the most abstruse examples came in the UK’s 2022 Tory party leadership race, when Liz Truss and Rishi Sunak puzzled observers by talking in mainstream televised debates about esoteric financial regulations — in particular their rival plans to remove Solvency II insurance regulations and “unshackle” the City of London from pre-Brexit EU rules on capital safety.

The trend has been ramping up for a while. Since the 2008 financial crisis triggered a global regulatory crackdown, the rule books that govern the world’s banks, insurers and asset managers have been drawn into ideological splits between Republicans and Democrats, and Conservative and Labour in a similar way to gender identity and climate change.

Back in 2010, when Dodd-Frank legislation to make banks safer was passed under Barack Obama’s US presidency, it included the creation of a new high-ranking financial regulation position at the Federal Reserve. Ironically, though, the first appointee to the role of vice-chair of supervision was not made until Donald Trump’s first term of office, and swung the pendulum towards deregulation: Randy Quarles lightened the burden on regional banks, including the likes of SVB and First Republic, which duly collapsed last year.

More infamously Trump openly sought to influence the Fed, when he repeatedly threatened to remove chair Jay Powell and demanded aggressive rate cuts. As Trump limbers up for his second run at the White House, aides have been drawing up alarming plans to seize direct control of the Fed.

In the UK, too, political interference in supposedly independent financial policymaking has been on the increase. Last month, in an interview with the Financial Times, chancellor Jeremy Hunt publicly rebuked the latest policy initiative from Nikhil Rathi, the chief executive of the Financial Conduct Authority. “I hope the FCA re-look at their decision,” Hunt said, referring to the regulator’s plan to announce the identities of institutions it is investigating before it finds wrongdoing.

In many cases, it is hard to measure quite how much real impact loud-mouthed or arm-twisting politicians have on policymaking. But in the US — where the leadership of key regulators has long flip-flopped between Democrat or Republican control depending on who is in the White House — there is one ongoing fight that could prove extremely consequential.

Last week, Marty Gruenberg, the Democrat chair of the Federal Deposit Insurance Corporation, an important banking supervisor, tendered his resignation. On the face of it, the departure has nothing to do with politics, coming on the back of a workplace culture review that found Gruenberg presided over a “misogynistic” organisation. The Wall Street Journal last year published an investigation into sexual harassment and bullying at the organisation. 

But the affair, whether politicised from the start or not, certainly is now. Only with Gruenberg in place does the FDIC board have a 3-2 Democrat majority to push through a tougher set of bank capital requirements, dubbed the Basel III Endgame, over the coming months. Republicans, echoing the protests of Wall Street, have opposed the new rules (already watered down by the Fed). So far, Gruenberg seems to have outsmarted his critics, specifying that his resignation will apply only once a successor is anointed. Late last week, Republicans asked Gruenberg to appear at a congressional hearing for the second time in a month. 

“The Republicans won’t give up until they force Gruenberg out and install the Republican vice-chair,” says Dennis Kelleher, who heads the Better Markets campaign group. Such an outcome could not only scupper bank capital rules designed to make still-fragile regional banks safer, as well as buttressing the giants of Wall Street. But at a time when Joe Biden is trailing Trump in key states extra publicity for a scandal involving a key regulatory ally like Gruenberg could also further damage the president’s re-election hopes. Politicised regulation cuts both ways.

patrick.jenkins@ft.com

Letter in response to this article:

Politicians want to see the regulators regulated / From Lord Bridges of Headley and others