General Increase in Government Intervention Safety Nets Bail outs Deposit insurance Discount windows Decrease industry stability

General Increase in Government Intervention Regulations Heightened Supervisory Power Requires market discipline Improves corporate governance Improves bank function

General Increase in Government Intervention Increase market discipline Increase cost efficiency Increase profit efficiency Reduce asymmetric information Reduce transaction costs Decrease stability Economies of scale in compliance costs Discourage entry of new firms Consolidation into larger banks Reduction of competition

General Increase in Government Intervention Increased Regulation requires increased information disclosures Information disclosures are costly Compliance is expensive

Regulatory Consolidation: FIRA FIRA OCCOTS State Bank Supervision (from Federal Reserve)

FIRA: Efficient Information Sharing NCUA Fed FDIC OCC OTS Financial Intermediaries FDIC FIRA NCUA OTS OCC Fed

Regulatory Consolidation: CFPA CFPA FDICOTS Federal Reserve NCUAFTC

CFPA: Potential Benefits and Problems Potential Benefits:  Higher standard of accountability  New customers  Innovation of standardized financial instruments Potential Problems:  Hinder innovation in other areas  Profit inefficiency  Lower growth rates

Regulatory Additions: SEC & CFTC SEC Executive Compensation Disclosures Credit Rating Agencies Corporate Governance Derivatives Hedge Funds >$100M CFTC

Inadequate Funding SEC Needs:  Increased assessments on institutions  Exemption from appropriations process  > $1.026B 2010 CFTC Needs:  >$14.6M  38 new jobs  Larger Staff

Regulation of OTC Derivatives by SEC & CFTC Current Proposal: Only standardized derivatives enforceable when traded on exchanges Customized derivatives enforceable only when traded over- the-counter Historically: Speculative trading allowed only on exchanges CDS’s are enforceable only if one party has an insurable interest, or has a real pre- existing risk

Increased Capital Requirements U.S. core capital requirements for banks far exceed international averages Largest banks in U.S. ranked in top 20 of The Banker’s Top 1000 listing* May move financial relationships abroad Trade-off between cost efficiency and profit efficiency *(ranking firms by strength measured in Tier 1 capital using data from 2009)

Restrictions On Banking Activities Obama’s Recommendations: Commercial banks retain investment banking operations BUT: Banks banned from investing in hedge funds or private equity Limit bank growth: Limit market share of liabilities a bank is allowed to take on Ban proprietary trading “Loopholes”: Murky definition of proprietary trading Treasury Department may allow banks to drop their status as bank holding companies and avoid such regulations

Trade-offs ConsPros Profit inefficiency Cost inefficiency Growth Restriction Bureaucratic Inefficiency ControlTransparencyStability

Considerations Costs will ultimately be borne by clients “Risk management is not about the elimination of risk; it is about the management of risk.” –Thomas F. Siems Macro-decisions

Macro-Decisions Stability v. Growth opportunity Cost efficiency v. Profit efficiency Ability to compete abroad Aggregate effect of changes Short-term v. Long-term goals Acceptable Risk v. Unacceptable Risk