With a new year comes the opportunity for new beginnings -- and this year, a new presidential administration. President-elect Barack Obama and the predominantly Democratic Congress, however, will take power during one of the worst economic downturns of the century. As the baton is passed, the financial services industry is left wondering just how much the Democrats will favor their historically pro-regulation inclinations.
According to industry experts, banks will experience greater oversight as the new administration seeks to help the finance sector recover -- and prevent a repeat of the past year's lending debacle. The main question is just how much the government will tighten its control over banks. Another issue will be the demands placed on bank IT organizations to facilitate the new compliance requirements.
"There's a 100 percent probability of increased regulation," says Sandeep Vishnu, managing director, risk, finance, compliance and security, with McLean, Va.-based BearingPoint. After all, "Failure of regulatory oversight has been identified as a clear contributor to the crisis."
Ed Kramer, EVP of regulatory programs with risk and compliance solutions provider Wolters Kluwer (Amsterdam), already reports movement in Washington agencies to toughen oversight. "In anticipation of a Democratic administration there are tendencies to put in place tougher enforcement of regulations," he explains, adding, "but not necessarily more regulations."
Banks and regulators are implementing measures to correct the errors of the past, adds Eric Bass, the lead for the financial services business consulting practice at Devon, Pa.-based SMART Business Advisory and Consulting. "The new administration will have some strong forward momentum to implement changes, but the change has already begun," he says. "The question is, to what degree does the government allow the market to self-regulate?"
Although regulatory change is needed, Bass continues, it doesn't have to be too dramatic given the efforts currently under way to tighten lending standards. "Regulators don't want to introduce anything that gets in the way of commerce," he states. "It has to be enough to protect consumers [yet] not introduce more stress and restraints on the market."
Jeanne Capachin, research VP for Framingham, Mass.-based Financial Insights' global banking practice, says it's simply not in the government's best interest to hobble the U.S. financial industry too much. "This is going to be a situation where the bark is worse than the bite," she predicts. "There were serious systemic risks that were ignored. There will be new regulations, otherwise there will be a public outcry. But I can't see the regulations being too unreasonable."
Primarily, Capachin says, regulation will center on transparency in the credit card industry and the ability of issuers to set rates and fees. But she also sees changes coming for the capital markets sector since the surviving independent investment firms are now bank holding companies and subject to new oversight. "There will definitely be more regulatory oversight as the FDIC and Fed become more involved," Capachin relates. "That segment of the industry will be smaller and more conservative -- on the outside. But as soon as you make new regulations, there will be smart people in these firms who will figure out a way to get around them."
At the core of any regulatory efforts, says S. Ramakrishnan, CEO for Oracle Financial Services Software's (Redwood Shores, Calif.) Reveleus and Mantas businesses, will be transparency and accountability. "People feel the only way to get everyone's attention is to enact new regulations," he remarks. "It's the psychology of the situation. There's an opportunity for new regulations to exist along the lines of Basel II or SOX. Where Basel says, 'Thou shalt look at everything,' the SOX part says, 'Thou shalt be accountable' -- and I especially see this in the capital markets area."
As the Obama administration sets a new regulatory tone, however, aside from creating regulations for regulation's sake the biggest mistake it could make would be to allow all the regulatory agencies to continue to operate in their own spheres, according to several observers. "We have five agencies in the U.S. with overlapping responsibilities -- there are structural issues that led to this crisis," contends BearingPoint's Vishnu. "You have Fannie and Freddie with mandates to provide loans to people who might not necessarily be eligible. The FDIC can't be touched except through an act of Congress. Then you have the Fed, the SEC and the OTS [Office of Thrift Supervision]. We have a very fragmented regulatory environment in the U.S. The way the EU has consolidated its regulatory bodies is a better model for us."