Clinton Offers Incremental Vision of Wall Street Reform

WASHINGTON — Democratic presidential favorite Hillary Clinton laid out a plan Thursday to rein in the excesses of the U.S. financial system, emphasizing the need to prosecute Wall Street executives for wrongdoing, tighten Dodd-Frank Act rules and boost funding for financial regulators.

But the plan appears to move only incrementally beyond reforms already put in place by the Obama administration and is still a far cry from the more daring proposals of her most formidable Democratic competitor, Sen. Bernie Sanders, who has called for a wholesale restructuring of the biggest banks.

In a policy proposal published on her campaign website, Clinton highlighted the need to incentivize responsible risk-taking with steps to further the reforms shepherded by President Obama.

"To prevent irresponsible behavior on Wall Street from ever again devastating Main Street, we need more accountability, tougher rules, and stronger enforcement," Clinton said. "I have a plan to build on the progress we've made under President Obama and do just that. We can't go back to the days when Wall Street could write its own rules."

The plan calls for a "risk fee" on any bank with more than $50 billion in assets that would be calibrated to impose higher charges on banks with more leverage and that rely on short-term wholesale funding to meet their day-to-day liquidity needs.

The Federal Reserve in July already imposed a capital surcharge on large U.S. banks tied to their reliance on short-term wholesale funding. The rule, in practice, required JPMorgan Chase, for example, to retain some $22 billion in additional capital. But Clinton's proposal would act as a kind of penalty for banks that engage in riskier and financing activities, requiring them to pay the fee to the U.S. Treasury Department rather than hold it aside.

Clinton also said she would push through legislation that would give regulators additional powers to force banks to restructure or downsize based on the risk they pose to the system. Clinton said she would appoint regulators who would use their existing authorities and these new powers to advance meaningful changes in the U.S. banking sector.

"Large financial firms would need to demonstrate to regulators that they can be managed effectively, with appropriate accountability across all of their activities," the proposal said. "If firms can't be managed effectively, regulators would have the explicit statutory authorization to require that they reorganize, downsize, or break apart."

Dodd-Frank's "living will" requirement already gives the Fed and the Federal Deposit Insurance Corp. the power to compel divestitures for banks with resolution plans that they consider not to be credible. But many Wall Street hawks — most notably Sen. Elizabeth Warren, D-Mass. — have criticized the Fed and FDIC for failing to find banks' resolution plans not credible and to initiate a process for that wholesale reorganization.

Clinton would also push harder on the so-called "shadow banking" sector — imposing greater margin and disclosure requirements on repurchase agreements, increasing leverage restrictions on broker-dealers, setting standard liquidity and transparency rules for exchange-traded funds and increasing the powers of the Financial Stability Oversight Council.

Much of Clinton's plan is effectively a Democratic party wish list of financial reform measures. The plan promises to crack down on executives who turn a blind eye to malfeasance by requiring settlement fees to come from their incentive-based pay; imposes a fee on high-frequency trading transactions; re-imposes the swaps push-out rule that was stripped from Dodd-Frank as part of the 2014 budget deal; eliminates the so-called hedge fund exemption from the Volcker Rule; and increases funding for the Department of Justice, Securities and Exchange Commission and Commodity Futures Trading Commission.

Isaac Boltansky, an analyst at Compass Point Research & Trading, said in a note Thursday that Clinton's proposals will likely be seen by observers as a political document as she seeks the nomination rather as than a blueprint for her legislative or regulatory agenda as president. That is in no small part because a Republican-controlled House would be unlikely to act on her proposals, he said.

"Our sense is that the core pillars of this plan — including a high-frequency trading tax, changes to the Volcker Rule, budgetary changes for financial regulators, and an expansion of prosecutorial authority — would face an uphill climb in the next Congress," Boltansky wrote. "We believe that Sec. Clinton's Wall Street reform plan will play a central role in her presidential campaign but the majority of the specific proposals included in the package are unlikely to gain traction in the next Congress given the near certainty that the GOP will retain control of the House."

The plan notably falls short of Sanders' and Warren's push for a forced breakup of the largest Wall Street banks. But it isn't clear exactly how much farther Clinton plans to move toward their position or how committed she is to move beyond what powers and policies are already in place.

The DOJ, SEC and CFTC already have the authority to bar any person from their respective spheres of the financial services industry and to prosecute wrongdoing they can prove in court. And the DOJ has already said in a memo this month that it will target executives at banks and other financial firms that are engaged in misconduct, though skeptics have said it is unclear what effect, if any, that memo will have on bank supervision.

Mark Calabria, a fellow with the Cato Institute and former Senate Banking Committee staffer under Sen.Richard Shelby, R-Ala., said that Clinton's proposal appears to be calibrated to give the appearance of a tough stance on Wall Street but containing enough escape hatches to avoid any binding commitments.

"I don't see anything on the page here that would have made a dime's worth of difference in the crisis," Calabria said. "To me it's really just kind of geared at [going] after some things that are dog whistles with progressives to make them feel like you're listening, without actually threatening anybody."

Calabria added that Clinton has a harder needle to thread on Wall Street issues than probably any other presidential candidate because she invariably carries the legacy of her husband, former President Bill Clinton, who is remembered for initiating the deregulatory trend in the late 1990s that ultimately spurred the financial crisis. But she also is running for the nomination of a party for which Wall Street is a target and where Sanders has met considerable success with an anti-establishment platform.

"There's probably nobody that has a harder time with this than her on either side of the aisle," Calabria said. "Gramm-Leach-Bliley was signed by her husband. Her husband is the picture of the Rubin-Citibank wing of the party. How do you get the benefit of being married to Bill without the downside?"

Dennis Kelleher, president of the public interest organization Better Markets, said that his initial impression of Clinton's proposal was positive, particularly in enunciating a need for more restrictions on high frequency trading and making banks less complex.

But he said the proposal appears to rely too heavily on regulators to enact the changes she envisions, especially when regulators have had five years to enact Dodd-Frank and key provisions remain incomplete. Even so, he said, most of the changes that Clinton favors could be enacted with existing authority — such as living wills — if only regulators had the fortitude to exercise it.

"You simply cannot place the protection of the American people from a devastating financial crash in the hands of regulators," Kelleher said. "On the other hand … if you actually implemented and used all of the powers and authority in Dodd-Frank today, you could actually end 'too big to fail.' "