U.S. President Donald Trump's administration is poised to start slashing back an array of banking regulations designed to guard against future financial crises, but which proved onerous for banks.
On Friday, Mr. Trump signed an executive order paving the way to dismantle large parts of banking reforms contained in the Dodd-Frank Act, a decade-long regulatory overhaul that sought to make the U.S. financial system more resilient. Last Monday, the President said he intends to do "a big number" on the 2010 law, calling it a "disaster."
A separate memorandum also halted the Labour Department's rollout of a new Obama-era rule that would impose stricter standards on brokers to act in their clients' best interests when giving retirement advice.
The precise impact of the regulatory rollback is hard to predict, but Canada's largest banks are hopeful it could give their U.S. operations a shot in the arm. In particular, Bank of Montreal, Royal Bank of Canada and Toronto-Dominion Bank are counting on stronger growth in their U.S. businesses to help drive higher profits as prospects for growth look slower at home.
"There is no question that the regulatory response to the crisis imposed a serious cost on the sector, both in terms of foregone revenues and expenses related to compliance with the new rules," said Robert Sedran, an analyst at CIBC World Markets Inc. "While there is still much uncertainty, any unwinding of those costs would have to be."
Mr. Trump's latest executive order directs the Treasury Secretary and regulators to draft a plan to revise major aspects of the 2010 Dodd-Frank law.
The Trump administration complains that existing rules limit options for consumers while dragging down economic growth.
Legislators who pushed it through wanted to boost financial-system oversight and stability, principally by raising the amount of capital a bank must hold to guard against potential losses. The rules also set a framework for winding down failing institutions, centralized exchanges and clearinghouses for trading opaque derivatives, and created the Consumer Financial Protection Bureau (CFPB).
U.S. bank executives chafed under the heavier regulatory burden, as Dodd-Frank constrained the amount of risk banks could assume, limiting their willingness to lend money. But U.S. banks have also spent billions of dollars complying with the new rules, and it's not yet clear how far the web of regulations may be unwound.
Mr. Trump's second move was to call for a review – and perhaps the demise – of the Department of Labour's fiduciary rule, a hotly contested, 1,000-plus-page document that was set to require brokers to put their client's best interests above their own in some situations. The rule, proposed last April, is meant to improve disclosure and clamp down on hidden fees and conflicts of interest when dealing with retail investors who have retirement accounts and 401(k) plans.
Financial firms countered that the new rules were onerous, inconsistent and even confusing, arguing the changes would limit choices for clients.
"What we often see, especially with the financial-services industry and regulations, is that what happens in the U.S. trickles up to Canada," said Michelle Alexander, vice-president at the Investment Industry Association of Canada. But Canada has moved ahead with its own, much broader plans to reduce conflicts of interest across the investment industry, and is unlikely to change course as a result of Mr. Trump's actions.
A boon for Canada's banks
Chief executives at Canadian banks have said they are cautiously optimistic about Mr. Trump's assortment of promises, but with details in short supply, most are withholding judgment.
Canada's six largest banks declined to comment on Friday's policy changes, though they are following developments closely.
In private, many executives are undoubtedly cheering on deregulation, but also suffering some whiplash as the U.S. regulatory environment makes another 180-degree turn. For years, Canadian banks have spent considerable time and money shifting gears and ditching business lines such as U.S.-based proprietary trading.
"There's been a very dramatic shift in the strategy that they've taken on the U.S. side that will now have to be, again, dramatically changed," said John Aiken, an analyst at Barclays Capital Canada Inc. "That aside, when the dust settles, this is positive for almost all of their operations."
In a December interview with The Globe and Mail, TD CEO Bharat Masrani said the signals Mr. Trump has sent make him bullish on bank's U.S. prospects – "of course, [assuming] they come to fruition."
"Part of [the President's] main message was that [he wants] corporate tax reform, because American companies are paying too much tax, infrastructure spending and less regulatory burden generally in the economy," Mr. Masrani said. "These three pillars [are] going to mean more growth."