“Obama has the election behind him and the worry about alienating a lot of the special-interest money at this point,” said Sheila Bair, former chairman of the Federal Deposit Insurance Corp. “This should be all about his legacy now and providing a truly stable financial system, one that serves the credit needs of the economy.”
Whether regulatory reforms have significant or negligible effects on Wall Street will be determined by the potency of the rules coming out of Dodd-Frank — many of which have yet to be finalized.
Financial firms have been outspoken in their criticism of heightened regulation, anticipating that compliance will put a stranglehold on their earnings. Many suspect the Obama administration might ratchet up enforcement in a second term. And the markets seemed to agree.
Shares of Bank of America fell 7 percent at the close of trading Wednesday, while stocks dipped 6 percent for Goldman Sachs and 2 percent each for JPMorgan Chase and Citigroup.
The administration appears to have no appetite to place additional pressure on the banks, said Jaret Seiberg, senior policy analyst at Guggenheim Partners.
Considering that Obama made little mention of going after the banks in the campaign, Seiberg suspects the administration may take a moderate approach to implementing financial reform.
“To get economic growth back in a meaningful way, you need regulations that won’t choke off the supply of credit to the economy,” he said. “So you’ll see more moderation across the board.”
Regulatory agencies will probably continue their pattern of “proposing something radical, but finalize something more moderate,” Seiberg said. There is a chance, he said, that regulators will ease how much lenders have to put down in their own money when they sell mortgage securities to investors.
Now that the election is over, there will be a clearer path to resolutions of regulations that have been caught up in interagency disputes, said Karen Shaw Petrou, managing partner of Federal Financial Analytics. She gave the example of the Volcker Rule, a provision of Dodd-Frank aimed at restricting banks from making risky investments with their own money. “Finalizing the basic framework of Volcker is in the industry’s favor because it eliminates the uncertainty that’s casting a pall over a lot of strategic planning,” Shaw Petrou said.
The five regulatory agencies charged with drafting the final Volcker Rule have said it should be finished before the end of the year. But internal rifts over how the rule should be shaped may cause further delays.
Critics say the administration has failed to prod regulators to expedite reform, and they anticipate the same in a second term.
“Reform driven by regulators largely pushing complex regulation is not something the administration is going to put a lot of political capital behind at this point,” said Neil Barofsky, former special inspector for the U.S. Treasury’s Troubled Assets Relief Program.
Even without an explicit push from the administration, there is general consensus in Washington and on Wall Street that financial reform must come to a definitive conclusion, said banking analyst Brian Gardner of Keefe, Bruyette & Woods.
“Large banks have devoted incredible monetary resources, time and effort into implementing Dodd-Frank. They may not like it, but they want the certainty of finality,” he said.
But there is a wild card, too. The surprise election in Massachusetts of Democrat Elizabeth Warren, who advocated for stringent financial rules during the Dodd-Frank debate, including the creation of a consumer protection watchdog, could represent a new source of pressure for big financial firms, Gardner said.
Shaw Petrou of Federal Financial Analytics said Warren could form a bipartisan alliance with conservative Republicans, such as Sen. Richard C. Shelby (R-Ala.), to break up the big banks.
“This will be among the most aggressive reform items on Congress’s agenda early in the new year, one with considerable political potential,” she said.