Finance

The preamble to the US Constitution enumerates the purpose of our government: to “establish Justice, insure [sic] domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity.”  The Eisenhower School Industry Study program explores the US industrial base’s ability to provide resources for the common defense. As one of twenty studied industry sectors, the Financial Services Industry (FSI) not only contributes directly to the health of the US economy, it also provides credit and liquidity to finance the defense industrial base.

Three views capture why the FSI remains critical to the United States’ national security. First, as the 2017 National Security Strategy (NSS) establishes, “Economic security is national security.” A safe and resilient FSI underpins a secure and prosperous economy. Accordingly, the FSI is designated vital critical infrastructure key to US economic security. Thomas Jefferson articulated a second, competing point of view, “banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Or more simply, the FSI poses a fundamental danger to the nation. The third point of view, that of Alexander Hamilton, highlights the FSI’s value to a nation’s future greatness: “And thus by contributing to enlarge the mass of industrious and commercial enterprise, banks become nurseries of national wealth…” Although seemingly divergent, these views all share a common theme, the criticality of the FSI to national security. Not only is FSI directly linked to today’s national security, it both poses an inherent danger while also being fundamental and essential to the nation’s growth, development and prosperity. The purpose of this study is to develop policy recommendations through which the financial services industry can more securely support and make a greater contribution to national security.

Nearly 10 years after the 2008 global financial crisis, several significant contextual events occurred and influenced the FSI. Shortly after his inauguration, President Trump issued a Presidential Executive Order (PEO) on Core Principles for Regulating the United States Financial System to examine the post Dodd-Frank regulatory architecture. Subsequently, an additional PEO followed on Assessing and Strengthening Manufacturing and Defense Industrial Base (DIB) and Supply Chain Resiliency of the United States, including assessing the FSI’s ability to provide the credit and liquidity necessary for a vibrant and responsive US DIB. The next action was to identify the key priority actions—reduce regulatory burden and promote tax reform—in the 2017 NSS. 

These events spurred several key actions affecting the US FSI. Congress passed the most significant US tax reform in 30 years. Additionally, both chambers of Congress moved forward to reform the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). In addition to these actions, low unemployment and increasing consumer prices encouraged the Federal Reserve Board (FED) to target three federal funds rate increases in 2017 signifying an increasing confidence in the economy. The FED also began balance sheet normalization in October 2017 by starting to unwind quantitative easing, in use since 2008. These and other contextual factors contributed to this period being an inflection point for the FSI.

Given these events, the 2018 Financial Services Industry Study (FSIS) team filtered its analysis through three lenses: industry support for national security, how the regulatory framework identifies dangers and builds safeguards against them, and how the industry is postured to nurture. the nation’s future wealth and economic prosperity. The team performed this analysis through an examination of selected firms, regulatory agencies, industry organizations, advocacy groups, and law enforcement, which included discussions with key government and industry leaders. The FSIS study included visits to the top ranked Global Financial Centers (GFC) including: #1 London, #2 New York, and #4 Singapore.7 (Appendix A) For the past ten years, Singapore and Hong Kong have alternated between third and fourth on the GFC index.

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