Banking tug of war escalates with federal legislation
Colorado banks caught in a tug of war between politicians calling for increased lending and regulators curtailing lending face additional struggles under financial reform legislation, according to the president of an industry association.
“We do feel caught in the middle on a lot of this stuff,” said Don Childears, president of the Colorado Bankers Association based in Denver.
The likely result of specific provisions of the Wall Street Reform and Consumer Protection Act as well as the cumulative effect of hundreds of new rules will be increased costs to banking customers and less credit availability, Childears said.
While the newly enacted legislation offers some needed reforms, the measure fails to address many of the causes of the financial meltdown that preceded the recession, Childears said. Meanwhile, the 2,300-page bill will create a plethora of new regulations, some of them likely contradictory, for commercial banks. “This behemoth has missed the target.”
Among other things, financial reform legislation creates a consumer protection group, mandates more transparency in derivatives trading and limits the types of speculation in which investment companies can engage.
The bill allows investment companies to trade interest rate swaps and certain credit derivatives to hedge risk, but requires them to set up separately capitalized affiliates to trade derivatives in what are deemed risker areas.
The bill also includes a limited version of the so-called “Volcker Rule” that restricts exposure to the types of speculation in which banks can engage. The bill allows ongoing investments of not more than 3 percent of tangible equity in private equity or hedge funds.
The law will take years to implement as hundreds of new rules are written and dozens of authorities transferred between agencies, some of which must be created.
Childears said provisions of the bill fail to address some of the issues and organizations that led to the financial crises, not the least of which include the Federal National Mortgage Association and Federal Home Mortgage Corp. Fannie Mae and Freddie Mac became the guarantors for the vast majority of home mortgages in the country. While Fannie Mae and Freddie Mac operated for 40 years as private companies financially protected by the federal government, the government took control in 2008 after the collapse of the mortgage industry pushed the entities to the brink of insolvency.
Childears said a secondary market is needed to enable banks to sell mortgages and free up funding to issue more loans. But it’s uncertain what will happen to Fannie Mae and Freddie Mac, he said: whether they’ll be owned and operated by the federal government, turned into private entities or restructured with controls and subsidies. The first option is the most likely, he added.
Meanwhile, financial reform legislation will impose additional regulations on commercial banks that are already heavily regulated, he said. “It just heaps more regulation on the industry than we can fathom.”
Specific capital provisions in the reform bill are likely to reduce credit availability, he said. The cumulative effects of additional regulation will drive up the cost of compliance, costs banks will be forced to pass on to customers, he added.
The added costs of compliance could force some smaller independent banks to merge or sell out to larger competitors, he said. And that will mean fewer choices for banking customers. Childears estimated the additional regulations double the minimum size a bank must maintain to remain viable.
Although demand for loans has decreased and credit standards have tightened, Childears said lending by Colorado banks fell only 5 percent in 2009 compared to 2008 and has declined slightly in the first quarter of 2010.