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A Long Road Ahead for FIs as New Administration Takes Shape

With the election results in, Financial Insights, in its analysis of the incoming Obama administration, does some prognosticating as to what the industry should expect in the coming four years. Among its top predictions: more consumer protection legislation, incentives to reduce offshoring, more bank failures, a streamlining of banking regulatory agencies and the federal regulation of the insurance industry.

In its research note "The 2008 U.S. Elections and Impact on the Financial Services Industry: What To Watch," the firm says these moves would be inevitable no matter which candidate won the presidency. However, now these issues will be tackled with a democrat in the White House and a Congress that holds a larger majority from that party.

On the regulatory front, the firm says the lame duck Congress will likely hold hearings on the financial crisis, looking to lay blame as it interrogates bankers and regulators. This, says the firm, could actually contribute to the volatility since it may negatively impact consumers' trust in the financial industry further. Expect to see reform of mortgage origination practices, limitations on exotic investment instruments, the absorption of the Office of Thrift Supervision by the FDIC, federal regulation of the insurance industry, and increased capital adequacy requirements for all financial services segments.

As for offshoring, Financial Insights predicts that Obama will follow through on his campaign promise of ending tax breaks for companies that continue to send jobs overseas and rewarding those that increase U.S.-based jobs with tax credits. On the other hand, the note says, "Countering this potential government policy will be the necessary cost containment that beleaguered banks can attain with labor arbitrage." Since the national prerogative is to actually strengthen the financial industry, any rulings with regard to offshoring will need to find a balance between the two competing goals of increasing U.S. employment and stabilizing the industry, the firm says.

Financial Insights takes the stand that taxes have little to do with offshoring, however. As cost pressures increase from recession, the industry consolidates and more foreign companies buy American financial services firms, there might actually be an increase in offshoring, it predicts.

Also, questions will remain around the passage of the Emergency Economic Stabilization Act of 2008 and its criteria by which it determines whether a bank is worth saving. Financial Insights believes there might be more transparency around this with the Obama administration.

Further, the firm says it expects a reduction in the number of FDIC-insured financial institutions in 2009: from 8,400 to 8,000. "This is a needed culling of the herd to ensure that it is those institutions with skilled management, strong risk management cultures, and good business practices that lead the industry from the brink of disaster."

It concludes that regulatory change, although unavoidable, will be slow to come as legislators and the industry work to find a balance that mitigates risk and helps U.S. institutions remain competitive globally. The note adds, however, "Individual culprits will however be identified and pilloried to assuage the pain of homeowners and investors (also known as voters). Retribution will likely be paid by these individuals, rather than the financial industry or particular institutions."

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