New Financial Rules Will Lower Bank Profits

This article was originally published by the Fiscal Times on Friday, July 2, 2010.

The landmark financial overhaul legislation will raise banking industry regulatory costs, lower their profits and limit their use of their own assets in risky investments.

By Katherine Reynolds Lewis

A major overhaul of financial regulations that cleared the House this week will put the banking industry on course for higher regulatory costs, lower profits and a renewed emphasis on more traditional activities like taking deposits and making loans.

The landmark legislation awaiting final action in the Senate later this month stops short of banning banks from investing their own assets, dealing in highly speculative derivatives or investing in hedge funds and private equity firms, as many reformists had urged. But the complex web of new rules in the 2,000-plus-page document will add an estimated $11 billion to the industry’s regulatory costs in the coming years. And it would put a crimp in the industry’s activities and shed more light on their activities with the use of clearinghouses and data repositories.

Rather than marking the finish line in marathon legislative negotiations, the new law's approval is more of a handoff in a relay race. Regulators will receive the baton and a mandate to write dozens of new rules to restrict banks' activities, increase capital requirements, protect consumers from fraud, and impose more oversight to prevent a repeat of the problems that caused the near meltdown of global financial markets and triggered a worldwide recession.

Once the financial industry emerges from the near-term pain of that transition, the new regulatory structure could facilitate measured growth in a new environment with less moneymaking potential but greater transparency and protection from failure, analysts said.

"In the long run the industry will be safer, people will be more confident and the spreads will be narrower," said Robert Litan, vice president for research and policy at the Kauffman Foundation. "The bill is sweeping in nature but a lot of the details have yet to be filled in" by regulators, Litan noted. "We don't know whether that's going to be a heavy touch or light touch."

Scott Brown Blocks Financial Reform Vote

This article was originally published by the Fiscal Times on Wednesday, June 30, 2010.

Freshman Republican Sen. Scott Brown objected to a stiff new banking fee which would cover the $19 billion cost of implementing new financial regulation.

By Katherine Reynolds Lewis

Just as Congress was on the verge of passing the broadest overhaul of financial regulation since the Great Depression — following hundreds of hours of debate over the last year — lawmakers are back at the drawing boards. Freshman Republican Sen. Scott Brown objected to a stiff new banking fee which would cover the $19 billion cost of implementing the new regulation.

"It is especially troubling that this provision was inserted in the conference report in the dead of night without hearings or economic analysis," Brown, R-Mass., wrote to the Democratic lawmakers shepherding the legislation through Congress. "Costs would be passed on to the millions of American consumers and small businesses who rely on major U.S. financial institutions for their checking, ATM, loans or other services."

Brown's constituents include the country's largest mutual funds, such as Fidelity Investments and State Street Corp., which objected to paying a fee when it was excesses in the banking industry at the heart of the financial crisis that sparked a worldwide recession.