Annie Lowrey reports on yesterday’s conference on financial regulation implementation:
And that rule-writing is ongoing among dozens of agencies, including the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Chicago Board Options Exchange, the Treasury Department and the Federal Reserve. The government is also in the process of organizing and hiring workers for the new $500 million Consumer Financial Protection Bureau. And the massive legislation is drawing major lobbying interest. This campaign cycle, the American Bankers Association has pledged $13.6 million on lobbying and $2.1 million to campaigns, pushing for looser rules on banks. J.P. Morgan Chase alone has contributed nearly a million to campaigns this year.
So how will those interested in reform know if it is working in the meantime? The question posed to the gathering of 40 or so met with many answers. “[Reform] would be working if the banks were making a lot less money,” [Rep Brad] Miller argued. “The reality is for it to be successful it has to be a win-lose-win,” with markets and consumers winning, and banks losing. The Wall Street Journal reported yesterday that financial-sector corporate profits are near their all-time highs.
I think some of this interest in financial sector profitability is a bit misguided, but since people want to lay down markers in this regard I think it’s worth trying to draw some distinctions among ways banks could make less money. One thing that could happen is that the profitability of financial services could decline. Another is that incumbent firms could lose market share to new entrants. A third is that financial services could decline as a share of US GDP. A fourth is that the overall rate of US GDP growth could fall. Or you could have some combination of these phenomena.
Sometimes you see people cite statistics that combine these factors in a confusing way. Much has been made, for example, of financial sector profits as a share of overall corporate profits. The numbers are sufficiently striking as probably constitute cause for alarm, but as a metric this is an odd one. If competition between cell phone carriers becomes more robust, leading to falling prices for consumers that’s a good thing. But since it implies smaller profits for Verizon and AT&T it means banking sector profits will rise as a share of overall profits. But who cares?
There are also the international issues. Any given country can sort of squeeze financial activity outside of its borders with harsh regulations, but that doesn’t do anything to reduce the likelihood of a global financial crisis or even really to reduce that country’s vulnerability to crisis. The crisis-prevention aspect of financial regulation really has to be tackled globally, which is good reason to be pessimistic (better global governance and more international coordination needed is never a good sign for your issue), but also a reason not to look too myopically at the state of play inside any one country.