Archive for January, 2011

The Year of Regulation and Uncertainty

January 10, 2011   Posted in Uncategorized | No Comments | Email This Post | Print This Post

The Dodd-Frank Act includes at least 243 new rules in 2,300 pages of law.  It creates 13 new bank agencies that will have thousands of Federal employees.  The implications for banks over the next several years are dramatic.

For bank boards and executive managers, several strategic issues are important.  Here are my near-term views on the implementation of Dodd-Frank.

  • Short-term uncertainty will dominate as hundreds of rules are written and new agencies are launched.
  • Bank compliance and reporting costs could double over the next several years as banks implement the new regulations.  Compliance costs will be the fastest-growing expense category for banks during this time.
  • The often discussed reduction in revenues for some product lines and loan types may materially affect financial performance.  Banks will need to counter the loss of these revenues with substitute strategies that increase revenues, and it will not be easy.  Overdraft protection programs, interchange fees and mortgage related revenues are three areas of immediate risk.
  • The Dodd-Frank Act drives mortgage lenders to the “middle of the field” and will initially severely limit product options and loan officer compensation strategies.  The cost of originating mortgages will increase due to dramatically greater compliance requirements.  Secondary market options, including Fannie Mae, Freddie Mac and other investors, will continue to tighten and offer banks fewer choices for their customers.  Fewer customers will qualify for secondary market mortgages.
  • Bank consolidation activity will increase.  A number of bank boards will conclude that their best option is to merge and create larger organizations. It’s conceivable that we will have 1,500 fewer banks in a few years – a 20 percent reduction.
  • Too much time will be spent by directors and executives and line managers to implement the new requirements.  This will limit the ability of banks to devote time to other important initiatives, including new products, technology investments (other than regulatory and reporting) and customer acquisition and retention.

So, what can banks do? I believe that banks need to continue to strongly advocate independently and through their trade associations to Congress and their regulators to achieve a better balance to the Dodd-Frank implementation. The battle for more reasonable regulation needs to be fought on two fronts: with Congress and with regulatory agencies.  I am a strong believer in the concept of “regression to the mean,” the tendency for events to move to the middle over time.  I anticipate that as the negative drag of overregulation and unintended consequences become obvious that the worst aspects of the regulation will be eliminated. This, however, will take months and years.  One of the bankers’ most important initiatives during this time is to advocate on behalf of their banks, the industry, and their customers.

About Jim Jones

James D. Jones, a national speaker for 16 years, has presented to financial services and mortgage audiences for organizations of all sizes.More >

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