Only the Strong will Survive!

by Dr. Mark Steckbeck Assistant Professor of Economics - Campbell University,

Bob Broda - Managing Partner Visage Solutions

With great fanfare and aplomb, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. This legislation, a response to the recent – albeit prolonged – financial crisis, confers extensive authority upon eleven new and existing regulatory agencies, some of which failed to reign in abuses that at least partially created this financial crisis. What can banks and their customers expect with this new legislation?

The Dodd-Frank Act imposes significant changes on the supervision and operations of all bank and non-bank financial institutions. Eleven agencies are now charged with writing 243 new rules, conducting 67 regulatory studies, and issuing to Congress or other overseers 22 new reports. These rules will take time to draft and implement, notwithstanding assurances by Treasury Secretary Geithner that the process would move quickly. In the meantime, banks need to prepare for the coming changes.

As with any regulation, regulators suffer both information and incentive problems. What rule serves the interests of the general public best? And even if the regulator possessed such information, what incentive do they have to get it right?

With the Dodd-Frank Act, regulators will also struggle with jurisdictional problems. State and nationally chartered banks, as well as big and small banks, fall under different regulatory agencies. Some of these agencies operate within other agencies, or within independent agencies, all competing for greater control and influence over the banking and financial sectors of the economy.

These problems will adversely affect bank and non-bank financial institutions of all sizes, and those chartered by both the national and state governments. But it will most especially affect smaller banks since they lack the political clout to sway policy to their advantage.

What determines a small bank from a large bank, thus triggering a different set of regulations, is the asset value of the bank. To avoid falling under the regulatory regime of larger banks, smaller banks may find it in their interest to maintain assets under $10 billion. However, even though the Fed may allow higher earnings per share for smaller banks, they may still be at a competitive disadvantage so expect smaller banks to consolidate to gain economies of scale.

The rulemaking process under the Dodd-Frank Act is likely to take some time. However, we believe it is advisable to address many of these issues now:

- More flexible regulatory requirements depending on bank size

- Simplifying offerings

- Decreasing revenues

- Increased compliance costs

- Increased capital requirements

- Increased disclosure requirements

Increased compliance costs: Current processes will have to be modified to include the changes necessary to comply with upcoming, yet currently unknown, regulation. Banks will be requested to produce additional information on a transactional basis, which increases operating expenses.

Examination fees - As a result of the Dodd-Frank Act, both the FDIC and the FRB are now authorized to also assess fees or charges on any entity for which it carries out its supervisory responsibilities, including holding companies for the FRB.

Capital requirements: While Title I of the Dodd-Frank Act imposes more stringent capital standards on all depository institutions and holding companies, Title VI seeks to implement a relief valve, requiring that capital standards be “countercyclical” so that the amount of capital an insured depository institution is required to maintain increases during an economic expansion and decreases during a contraction. This is ostensibly consistent with the safety and soundness of the insured depository institution. As a result, insured depository institutions will more likely be subject to specific capital requirements based on capital ratios for each specific institution, rather than the current one-size fits all system.

Enhanced disclosures: Ensuring that consumers are aware of their respective bank’s asset holdings and financial transactions will increase the costs of overseeing these transactions. Disclosure of executive compensation may be more emotional that costly but banks should be concerned with disclosing their executives’ compensation.

The Volker rule: The Volker rule precludes firms from engaging in risky transactions with proprietary money and prevents banks from owning more than a small share of hedge funds and private equity firms. Some larger banks have already been addressing this by spinning off their more complex financial service offerings.

Durbin Amendment: This rule will drastically reduce bank revenues. Of primary concern is a new law that erases the bulk of the estimated $15 billion of interchange revenue.

To effectively compete in this environment, banks should consider the following strategies:

- Ensure you have the right strategy in place

- Consider which “usage” fees can be increased to recoup lost revenues

- Ensure you have the right people in the right role

- More effectively streamline processes

- Consolidate banking operations to benefit from economies of scale.

In this new environment only the strong (i.e., strong balance sheets, the right people and efficient processes) will survive!

Contact Visage Solutions today to see how we can assist you with this an other compliance matters.

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About Dr. Mark Steckbeck

Dr. Mark Steckbeck is an assistant professor of economics at Campbell University. The views expressed in this paper in no way represent the views of Campbell University

About Visage Solutions – www.VisageSolutions.com

Visage Solutions is a consulting company operating in the areas of regulatory compliance, risk assessment, information security, risk management and compliance processes. Utilizing our proprietary SingleVue™ and OpsAudit™ methodologies, the company focuses on assisting business entities in mitigating operational risk. Visage has provided solutions to a client base ranging from private, entrepreneurial companies to large multinationals. Our team is comprised of experienced executives, managers and consultants who can assist clients with the development, implementation and execution of their risk management and compliance strategy.