Major banks recently reported their best year since 2006, but bankers worry about future economic and regulatory conditions.
The combined profits of $63 billion of the six largest banks are the most since before the subprime lending crisis struck in 2007. The subprime crisis, as it turned out, was just the tip of the iceberg in the financial services industry meltdown that saw Washington Mutual, Lehman Brothers and other financial services firms fail while others struggled to stay afloat.
The top six banks – Bank of America Corp., Citigroup, JP Morgan Chase & Co., Wells Fargo & Co., Goldman Sachs, Inc., and Morgan Stanley – have improved financially, but return on equity, higher capital requirements, below book value stock prices, declining bonuses, industry consolidation, staff cuts, and continuing concerns over the European financial crisis have bankers concerned over the immediate future.
The bankers’ current worries stem in part from government’s actions in response to the financial crisis of 2008, said John Berlau, director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. This includes enactment of the Dodd-Frank financial regulatory law in 2010. The bill itself is more than 2,000 pages long, and only a small portion of the Dodd-Frank regulations have been written, leaving bankers questioning where the final rules will leave them and their institutions.
“The law’s biggest impact will be on community banks,” said Berlau. “The law has more than 400 rules, only 30 percent of which have been implemented.”
Not knowing how some of the elements of the law will be implemented has banks holding on to more capital than is currently required in case they need it after rules are written.
“Uncertainty is certainly harmful,” Berlau said.
The American Bankers Association recently pointed out a multitude of concerns with the Dodd-Frank legislation. These include
• A requirement that federal regulators review and remove references to credit ratings for all regulations. The ABA says this has huge potential consequences, as existing capital rules rely heavily on external credit ratings.
• Greater volatility in regulatory capital measurement, which the ABA says could greatly affect a bank’s regulatory capital measure. The more capital that has to be held in reserve, the less that is available for bankers to invest or lend.
• New rules to be written by the Consumer Financial Protection Bureau: The Bureau will make rules for 17 consumer laws—seven of which are expressly banking laws—and the rulemaking process has already begun. This expansive rule-writing authority will be exercised by a single director over all banks, large and small, and will touch all consumer financial services and products. There is no community bank exemption from the Bureau’s rule-writing power.
• Double jeopardy for community banks. Banks are now subject to overlapping rules. Banks may follow the Bureau’s rules but still be cited by a regulator for matters in such areas as debit card overdraft, direct deposit advance, and rewards checking.
• New recordkeeping and reporting requirements. Under the Dodd-Frank legislation, the CFPB has broad authority to require reports or “other information” from any bank at any time. In addition, the Bureau will require banks to compile and report additional Home Mortgage Disclosure Act and HMDA-like small business loan data. All banks also will be required to provide customers with expanded access to account, transaction, and fee information.
‘Plain Vanilla’ Products
The ABA also noted bankers are worried about development of new products and services because the CFPB will favor standardized “plain vanilla” products.
“The CFPB will have broad authority to curb practices it finds to be unfair, deceptive and abusive,” according to an ABA statement on Dodd-Frank. “Unless the Bureau abides by the bedrock premise that consumers are responsible for their decisions, what constitutes ‘abusive’ behavior may be very broadly applied and is very likely to create an environment conducive to increased litigation. This will be exacerbated by the fact that prudential regulators will allow their own examiners to invent their own theories about what constitutes an unfair, deceptive or abusive act or practice.”