Too Hard to
be Big / Too Small to Comply
Too Risky to
Get a Loan
Well it’s here! The new
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT
has been signed into law this week to guard against the sins of
the past. No longer will the excesses of Wall Street and the
Financial Services industry negatively affect Main Street. Well
that’s at least what the authors want to tell you.
The truth of the matter
is the current document of well over 2300 pages really doesn’t
tell you what is coming in the upcoming months and years.
Speculation rules! The only thing for sure is things are
changing and although changes were needed, this bill may
make things worse before it makes them better, if it ever does.
All we know for sure is things will be different!
Besides the creation of
seventeen new agencies that will increase the size of
government, it will pose a set of rules and regulations on
financial institutions that will fundamentally change the
financial services industry as we know it. Not necessarily a
bad thing, depending on the change.
The “Too Big to Fail”
provision will limit the size of the financial institutions. The
past practice of buying and merging banks into Mega Banks will
come to an end. We will probably never again see a bank the size
of Bank of America, Citibank, etc. It will be interesting to see
if there is a push to break apart these bigger banks. If it
happens, it will most likely be the bank’s decision and not
“mandated”, although the hurdles a large complex organization
now must overcome will facilitate that decision. The good news
is that if any financial institution gets in trouble, the
investors of that institution will suffer the consequences.
They should not be coming to the American taxpayer looking for
a bail out. I think everyone will agree that that’s the way it
should be.
Now don’t get the idea,
that there will be more banks or financial institutions. On the
contrary, there most likely be far fewer. It really depends on
the new federal bureaucracies including the Financial Consumer
Protection Bureau, Financial Stability Oversight Council, Office
of Financial Research, Office of Financial Literacy, etc. and
the rules and regulations they impose on the financial industry.
But it doesn’t take a rocket scientist to figure out that it
will be more costly for a financial institution to comply with
the rules, regulations and audits these new agencies will
demand. After all, they really will need this additional
information to have any potential for looking for future “bad
business practices”. Other businesses besides banks will be
affected by these regulations and audits. These regulatory
bodies will likely be less forgiving than in the past. The
unwritten mode of operation that some institutions operate under
like waiting for the auditors to find violations before
addressing the problems will also most likely come to an end.
To cover these increased
regulatory expenses, there will most likely be some
consolidation of smaller organizations to be able to afford this
additional oversight (on a transactional basis). These extra
costs to the banks will mean that they will have to cut costs
else-where and increase fees to the end consumer.
The current practice of
ex bank executives starting new community banks may also be
slowed since it will now require additional costs and funding to
start a bank. Limiting the number of financial institutions to
audit and regulate may not necessarily be a goal of these new
regulations, but having less to regulate and audit will most
certainly make it less costly and easier to control.
The unintended
consequence of this new regulation will most likely be the
effect of small business. Although the authors have gone out of
their way to make sure that small businesses are not overly
effected by this new regulation. Banks will be forced into
implementing new sophisticated risk management techniques to
decrease their overall risk that most likely will limit the
amount of money they can loan.
The simple truth is that
small businesses are very risk propositions. More small
businesses fail than succeed, even more are simply getting by
and already highly leveraged. Small businesses that have been
able to survive thus far should be applauded for their hard work
and determination. Unfortunately, they will most likely be not
be able to get the new loan to help them succeed now that the
economy appears to be turning around. Even worse, the current
loans they have may be recalled since they now fall outside of
the risk parameters being set. Since our homes have been
devalued small business owners will not have the extra
collateral needed for the loans to be continued. So although
everyone wants small businesses to succeed, this new regulation
will most likely make it more difficult for that to happen.
Most banks are already distressed because of the mortgage
crisis, can they survive this new environment?
Contact
Visage Solutions today to see how we can assist you with
this an other compliance matters.
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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.
