What’s changing for banks?
The easiest changes to see are regulatory. Regulators have massive influence on how banks do business. From standards on loans to borrowing to capital, the overseers have been raising the bar.
And it needed to be raised. One of the causes of the Financial Crisis was lenient regulation. Regulators assumed that market discipline would keep the biggest institutions in line—that firms that mark-to-market every day didn’t need as much of a safety net. Well that didn’t work out so well. The first firms to fail were trading institutions: New Century Mortgage, then Bear Stearns’ hedge funds, then Bear itself. The failures and bailouts ballooned after that.
So regulators have increased capital standards and prohibited certain practices.
Most recently they have proposed a capital surcharge for big institutions that rely heavily on wholesale funding. All these regulations cost money—over $70 billion so far, by one estimate—and restrict credit growth just when the economy needs it. But the Financial Crisis showed that lax standards have a cost as well. To borrow a phrase, if you think bank regulation is expensive, just try the opposite.
It’s been said that generals tend to fight the last war. Let’s hope that the new regulations fix some of the flaws in our banking system—before they become fatal.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!