BID® Daily Newsletter
Sep 7, 2010

BID® Daily Newsletter

Sep 7, 2010

ADDING FUEL TO THE FIRE


Working at any company has its challenges, as we are sure everyone reading this publication can attest to. Whether it is hitting the monthly numbers, navigating a gargantuan credit crisis, or dealing with a boss or co-worker who is self-centered, rude, unethical or just plain smells bad - working in the banking industry right now is difficult to say the least. As if
that weren't enough, even more fuel has been added to the fire in the form of the most sweeping financial legislation reform the industry has ever seen. Bankers everywhere are carefully reading, analyzing and interpreting the new Frank-Dodd legislation, as they try to figure out its impact on the business.
While much of the law is yet to be interpreted by banking regulators, many new regulations are expected and community bankers will be directly impacted. Costs are certainly going to increase, leverage will continue to come down and management teams will be working hard to try and follow the expected byzantine trail of documentation that is likely to come. As the regulation writing begins in earnest, we have already been inundated with various groups interpreting the impact of components of the law. Much is open still and in the hands of the regulators, so some of this is premature, but it does surface some interesting things community bankers should know.
For instance, while community banks under $10B in size are exempted from primary examination, enforcement and assessments by the Consumer Financial Protection Bureau (CFPB), all banks are subject to its rule-making regardless of size. Additionally, the CFPB is housed within the Fed, but the Fed cannot intervene in enforcement actions or prevent the issuance of rules. For community banks, this means competition and costs around consumer product offerings are certainly going to go up. Whatever consumer business lines your bank has, be prepared to respond with more disclosures, policies, procedures, risk management processes and more transparent costs around products and services delivered to consumers.
The law gives the FDIC broader authority in the liquidation process of any bank. Under the new rules, the FDIC has options that include continuing to run the distressed bank, selling off assets, merging it and repudiating contracts. The FDIC does not need to get any consent from creditors, contract counterparties or shareholders, unlike how things work under the Bankruptcy Code. Banks that get into trouble can expect to see credit lines evaporate quickly (so beef up liquidity and contingency planning) and to have to pay up front for contracted consulting services before work begins.
Under the law, one year after its enactment, banks can begin paying interest on demand deposit accounts. This will allow banks to pay interest on business checking accounts and is likely to raise the cost and interest sensitivity of this form of funding. Expect NIM to shrink over time, as competition drives up funding costs in this area as banks battle to retain small business clients.
We will keep doing our research to keep you informed, as this massive regulatory overhaul works its way through the system. Given there will be some 250 to 350 new regulations released over the next 18 months and as various agencies undertake some 68 studies required under the law, the challenges will continue. As such, we will stand at the ready with our water cannon, in order to assist your team in putting out this regulatory conflagration - just in case the flames threaten to get too high.
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