It is summer, so some bankers may already be sitting on the beach with their toes in the sand. If you haven't yet taken your summer vacation or have decided not to (and are taking a "stay-cation" at home instead), you are not alone. In fact, we came across a survey that found about half of Americans are changing vacation plans and throttling them back due to the ongoing economic recession. Everyone needs a break now and again, so even if you are hiding out at home, don't watch economic news on TV (and occasionally get up and take a walk around the neighborhood) - you will come back at least modestly recharged and somewhat ready to go.
If you are lucky enough to be going on your vacation and are wondering what you are going to read while sitting on the beach, may we suggest regulatory periodicals, financial institution updates and other such fodder. At a minimum, you have kindling to start a massive bonfire; while on the other hand, you can come back to the office better informed than anyone else and keep your superman-never-say-die-I-am-so-on-my-game mystique.
If you are like us and you don't really want to ruin a good vacation with such deep thinking exercises of the brain, we'll let you in on a little secret - regulators don't really like to surprise anyone. Believe it or not, changes to rules and regulations are often laid out years in advance of any crackdown. It was that way with CRE concentrations (guidance released in Dec. 2006 - regulatory hammer drops in 2008), flood insurance (guidance released 2007 - focus increased in 2008) and many others. While the time between alert/change and examiner focus has shortened, the concept still exists today.
So as not to ruin a good vacation, we have been doing some digging and have found the following likely-to-be-announced soon regulatory changes coming down the pike. We pulled this information from prior alerts, notifications and plans in the works for regulatory reform.
Regulation underway will have components that are focused on reducing systemic risk and beefing up liquidity. Look for more stress testing of loans and liquidity to be sure banks have the capacity to ride out any storm. On a broader scale, look for US regulators to also push for a centralized clearing process for credit derivatives to improve transparency.
Regulators are also zeroing in on capital. Major weaknesses have appeared, so banks will probably be required to boost capital and also continue to see it calibrated to protect the overall financial system. Banks will have to focus on risk taken vs. liquidity available vs. industry situation, which will lead to evolving capital percentages over time we predict. Large banks will likely have to pony up more capital to address systemic risk concerns.
The Fed is now the liquidity provider for the US. Whether a company makes cars, is in the financial business or makes more widgets than anyone else, if it is big enough to cause systemic risk it will probably end up under the Fed's watch.
Regulators will also be working with accounting firms to force countercyclical loan loss reserve building. In the good times, banks may soon be able to build reserves, so they can use them in the bad times. While this sounds like a crazy idea, it is used in various countries around the world, so look for it to happen over time. Whether you call it contingent capital or a special appropriation of retained earnings, more capital will be held aside for a rainy day.
Money market funds will have to cough up money and contribute it to the bailout bucket. Uncle Sam doesn't do things for free and a guarantee on mutual funds is expensive. Look for mutual funds to receive a bill for services rendered.
We will be moving toward international accounting and banking standards quickly. We have learned the US is not on an island so more regulatory scrutiny, more consistency and tight adherence to global standards (yet to be outlined fully) are expected.
Whether you are going on a vacation somewhere in a tropical paradise or simply painting the house as part of your stay-cation, we hope you enjoy the time off.