Views on the integrity of global capital markets
04 March 2015

Cutting Through Politics: Why Financial Policy Advocacy Is So Important yet So Hard

Capitol HIll

It didn’t take long after November’s elections for the fireworks to reignite in Congress, especially in matters relating to financial services. Even after the so-called Cromnibus was approved by bipartisan majorities in both houses in early December, Sen. Elizabeth Warren (D-Mass.), a high-profile member of the Senate’s Committee on Banking, Housing and Urban Affairs, decried what she termed a giveaway to big banks. Then, a day after the new session began, the chair and the ranking member of the House Financial Services Committee traded sharply worded press releases accusing one another of taking the US economy in the wrong direction.

For even many astute observers, it is difficult to discern who or what to believe. Democrats contend that Republicans are using their new majorities to gut the Dodd-Frank Act whose provisions like the Volcker Rule they see as a needed response to the light-touch regulation that sacrificed American taxpayers to the interests of large, often “too-big-to-fail” banks in 2008. Attempts to change the governance of the Consumer Financial Protection Bureau (CFPB), for instance, is seen by Democrats as undermining the much-needed protections Dodd-Frank bestowed upon middle-class Americans.

Republicans, for their part, say Dodd-Frank failed to fix the big problems of 2008banking institutions that were too big and too well-connected to fail, and the politically connected mortgage market giants, Fannie Mae and Freddie Mac. At the same time, they say the rules have burdened not just the giant banks, but small, regional, and local institutions that didn’t trade or package structured products or over-the-counter derivatives. They also see the CFPB as having significant governance flaws that it is able to use in a manner that has limited the ability of small financial institutions to supply credit to their small commercial and retail customers. They do not see changes to the law as attacking the middle class, as Democrats contend, but see the changes as needed to spur economic growth. Republicans also see Democrats’ efforts to block attempts to even correct mis-spelled words as being ideologically motivated against changing the law’s now sacred text.

The outcome of this battle could have significant policy and economic implications, both here in the United States, and overseas, for years to come. Financial institutions of all stripes have invested billions in systems and processes to implement — and, in many cases, to fight — the many mandates incorporated into Dodd-Frank. That the US financial sector remains on uncertain grounds will not help performance or stability for the long term.

Indeed, such political uncertainty was cited by CFA Institute members in the latest CFA Institute Global Market Sentiment Survey (GMSS) as the most underestimated problem facing markets in the next five years. Political risk, together with other forms of political risks emanating from overseas, was seen by 25% of the 1,956 US respondents as potentially undermining global market performance. Globally, more than 5,000 respondents said improvements to systemic risk regulation and oversight, financial transparency, enforcement of existing laws and regulations, and corporate governance practices were the most important areas for regulators to address.

Getting the parties in Washington, D.C. to agree to such common-sense suggestions won’t be easy, though, as the hardened positions described above attest. But the need for common sense is particularly important in times like these. Without it, ideology takes precedence over prudence and practicality.

Despite the inherent difficulties of being in the position of the group in the middle, that is essentially the role that CFA Institute has attempted to play. Trying to work for the benefits of one segment of our membership can have negative effects on another. Advocating what is best for markets, overall, and investors, in particular, not only avoids these kinds of conflicts, it also applies the principles embodied in our Code of Ethics and Standards of Professional Conduct. It also has the benefit of applying the kind of common-sense solutions that members requested in the GMSS survey.

The challenge, nevertheless, to cut through the political rancor is to avoid getting labelled by either side — or both — as unhelpful, or worse, as siding with one party. To avoid such labelling, CFA Institute will continue to express its willingness to support or oppose legislation that we feel isn’t best for markets and investors. This strategy won’t be easy, though, particularly in an environment where disagreement with either side may be taken as tacit support for the broad policy objectives of the opposition. Nevertheless, we will continue to convey the value that comes from the experience, expertise, and ethics of our organization and members can bring to solving problems facing financial markets today.


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Photo credit: iStockphoto.com/drnadig

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About the Author(s)
Jim Allen, CFA

Jim Allen, CFA, is head of Americas capital markets policy at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

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