Hopefully they were temporarily distracted by the majesty of the Teton Mountains towering over Jackson Hole, Wyo., but attendees at the Tri-State Bankers Summit there last month were faced with the realities of regulatory reform and recovery from recession in the business sessions.
After summarizing the 1,974-page draft reform legislation being sliced and diced in the conference committee, Consultant Bert Ely focused on the aftermath for members of the Colorado, Montana and Wyoming Bankers Associations. It could take as long as two years for all the implementing regulations to be written and put into effect after a bill is passed, he predicted. “The legislation is just a kind of framework,” he said. Congress doesn’t feel competent to write the regulations, he explained, so that chore is left up to the regulators, who may come up with 100 or more new regulations.
The upshot will be increased regulatory burden and compliance costs, which could be a competitive burden for community banks. “Credit will become more expensive for weaker borrowers, when they can get credit,” Ely pointed out. He also fears the law of unintended consequences may strike with a vengeance as lawyers and financial engineers end-run the new rules.
Ely also lamented the fact that the legislation does not address public policy causes of the recent crisis, in his opinion. “Another crisis is inevitable — it is just a question of when and how bad,” he warned.
Too big to fail will still be around as well, Ely believes. “It’s not going to go away,” he said. “It comes down to who suffers the loss under what circumstances. It will take a big failure to settle it.”
Neil Milner, president and CEO of the Conference of State Bank Supervisors suggested the legislation may spawn as many as 300 new regulations. He noted that the process in conference committee doesn’t involve just merging the House and Senate bills; new things can be added as well. Among other things, an amendment is now included to make the $250,000 FDIC insurance limit permanent and retroactive to 2008.
During his presentation Milner made a flat prediction for the Colorado, Montana and Wyoming bankers attending the summit: “What will be included in the final reform legislation will be what can get 60 votes in the Senate.”
While the specter of onerous new regulations haunts community bankers, Tom Hoenig, president of the Federal Reserve Bank of Kansas City, offered some comfort by saying their model is the best in the world and one reason the United States “is the greatest country in the world.” Nevertheless, it faces threats, he warned.
It is a viable system, he emphasized, but it is handicapped and that is why he is such a vocal critic of too big to fail. The implied guarantee that the largest banks won’t be allowed to fail, along with their easier access to capital markets and higher leverage ratios are significant competitive advantages over community banks, he pointed out.
What is needed is a protocol that says, “If you fail here is what will happen,” Hoenig suggested. This would still allow the Treasury and the Federal Reserve to supply reserves for these organizations, he added.
He acknowledged it would be a difficult decision to break up the largest banks, but “it should have serious consideration.” And expanding on this subject in a question and answer period, Hoenig responded as follows to critics who say bigger is better to compete globally: “Based on our analysis, $100 billion gives you the size to compete globally, although you may have to share sometimes. Size is not in and of itself necessary for a strong, competitive economy. I don’t think they need to be $5 trillion — they are too big to manage.”
The bankers’ attention was turned to economic recovery by Jim DiMasi, managing director and chief fixed income strategist for St. Louis-based Stifel, Nicolaus & Co. DiMasi made the following points in his forecast:
Bill Poquette is editor-in-chief of BankNews.
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