In Banks We Trust

This is Doug Tengdin from Charter Trust

Whither the banks?

As our historic financial panic settles out, what is the likely future of bank regulation?

Clearly, we are not going back to the status quo. A hostile Congress and trillions in bailouts guarantee that. But what is the reform going to be? A Financial Consumer Protection Agency and that’s it? A mandate to break up the big banks?

My expectation is that a complicated formula will essentially require more capital as banks get bigger. The higher capital requirements will penalize size, because the larger an institution is in the current marketplace, the more likely it is to be tied up with the global payments system and thus involved with too-big-to-fail projects.

Many people would prefer a simpler system, but I suspect that the rules-writers will justify their positions by rating assets in terms of risk level. There will also be an expanded view of assets with various risk ratings, but less emphasis on credit ratings than before.

It’s clear that regulatory failures played a big part in the financial crisis and its aftermath. Many times regulators saw that banks were overexposed to one asset type or another, but were intimidated into backing off. Well those days are over. It’s clear that combined with some sort of expanded insurance, systemically important firms will face tough examinations and significant capital requirements.

Which leaves us with a question: In the past, bigger was better. Will it now be that small is beautiful?

Douglas R. Tengdin, CFA
Chief Investment Officer
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