At the Securities Industry and Financial Markets Association's (SIFMA) regulatory reform summit held in New York yesterday, panelists discussed the just-passed regulatory reform bill's impact on the financial industry.
The discussion, moderated by Toos Daruvala, leader of the financial services practice for banking and securities at McKinsey & Co., focused on the bill's big picture impact as well as what it means for securitization, the capital markets and investment banking specifically.
Jaret Seiberg, managing director and financial services policy analyst at Concept Capital, expressed stark criticism of the reform bill. He expects non-interest income to come under attack because of the Consumer Financial Protection Bureau (CFPB), which is part of the bill.
Seiberg said that the industry is too focused on the individual aspects of regulatory reform legislation, such as the Volker rule, that no one is worried enough about CFPB's establishment.
Fred Cannon, chief equity strategist and co-head of research at Fidelity Investments, said that banks will experience a decrease in profitability because of a drop in fees. As leverage goes down, he added, expenses will go up, although banks will be able to charge slightly more for loans and pay a little bit less for deposits.
Kian Abouhossein, managing director of equity research at JPMorgan Chase, noted the possibility of significant regulatory differences between the U.S. and Europe.
"What happens when Basel III comes?" he asked. "There is tremendous uncertainty, which is not good for bank performance." He mentioned a potential return of regulatory arbitrage between different kinds of financial firms. Nonbank financial companies, he suggested, would be able to exploit any possible disparity in regulation to seek an advantage over banks that face mounting restrictions.
Meanwhile, shifting the focus away from financial institutions to consumers, Cannon feared that average consumers would no longer be able to find the products that they had in the past, like free checking accounts at banks, which will likely be restricted by the coming reform bill.
"Free checking wasn't free at all," Cannon joked. He explained that the incentive lured new consumers into the banking system, but unsophisticated customers could often face a variety of fees.
Seiberg agreed, noting that if banks are forced to raise rates that they charge for products, Wall Street firms may try to exploit these hurdles and offer credit more cheaply.
"Hedge funds," Abouhossein said, "could be the big winners here." He expects hedge funds to pursue more OTC-type products, rates, and credits to compete with banks. Instead of eliminating the risk, he suggested, we have merely transferred it, allowing the next crisis to come in a different form.
Abouhossein expressed major concern for structured products that might not be solved, resulting in higher capital charges. He also cited Basel III as a potential concern for the securitization markets. This would require banks to hold higher levels of capital against securitized collateral.
"Where is the securitization market going to go?" he asked. "How are banks supposed to make money on securitization?"
Seiberg doubted that banks would lend under increasing uncertainty. "No one will put capital at risk if everything is in flux," he said. He cited the fact that the U.S. Treasury promised industry leaders that they would be notified of new capital rules by Dec. 31, 2009, and have yet to be updated.
"This long period of uncertainty is the real problem," he added. "When is the government going to tell us what the rules are?"
The new regulation may start a string of regulatory relief bills, Seiberg stated. "Democrats will be beside themselves when financial services arent made available to low income individuals," he explained.
Seiberg didn't seem concerned over the fate of small community banks, which will always remain due to demand by small businesses in local communities. It was medium-sized banks that he feared for, saying that regulation makes it harder and harder for them to maintain their businesses.
Cannon also discussed policymakers' growing concern over MBS. "Congress wanted mortgage-backed products to go away," he said.
The Question of Fannie/Freddie
Citing the fact that lending in the U.S. is 65% real-estate related, Cannon further questioned the capacity for borrowing in a market where there is not much room for growth.
Each of the panelists seemed to agree that, when it comes to Fannie Mae and Freddie Mac, doing away with government guarantees would be problematic. Seiberg went as far as to claim that the mortgage market only exists because of Fannie, Freddie, and the Financial Housing Administration (FHA). He doubted, however, whether FHA could handle all of the business from the GSEs if Fannie and Freddie were to be disbanded in the future.
"Regulators don't know what they want," he said. He expects Fannie and Freddie to play a large role in the 2012 presidential elections, where the Republicans will likely blame the agency mishaps on the Democrats in an attempt to retake office.
Cannon said that the guaranty on a 30-year fixed-rate mortgage is critical to the U.S. housing market, which could not exist without it. He warned of huge public outcry if Congress were to do away with the 30-year option. He told attendees that rates of homeownership are decreasing today, and that it is difficult for homebuyers to land a loan outside of the FHA.
He is not expecting a reprivatization of the market. but suggested the idea of a cooperative system. Under this type of program, banks provide capital investments to the GSEs in return for partial ownership, while still maintaining the agency wrap.
"You need to check your philosophy at the door and look at basic politics," Seiberg said. "The 30-year mortgage is just a part of America. It is politically infeasible for Congress to do away with that."
Abouhoussein compared the U.S. housing market to its European counterpart, where covered bonds, especially in Scandinavian countries, take the place of agency guarantees.