No sooner did President Obama present his ideas for reforming the financial services regulatory structure than the industry started weighing in with its own ideas around the proposals.
What seems to be a common thread amongst the associations, analysts and vendors alike is that although they welcome the effort to enact reforms on how banks and other financial services firms are regulated, they take issue with the creation of yet another regulatory body to police consumer products and eliminating the Office of Thrift Supervision.
The American Bankers Association's CEO Edward Yingling predicted in a statement that if the plan goes through as is, it will lead to mass confusion. "[W]e believe the Administration's proposal is so vast and controversial that it will be extremely difficult to enact and will produce great uncertainty in the financial markets and among financial regulators while it is pending. It needlessly rips apart all the existing regulatory agencies, eliminates charter choices and creates a new agency with powers to mandate loans and services that go well beyond consumer protection."
A release from the Independent Community Bankers Association also expresses "grave concern" about the proposed consumer watchdog group that it characterizes as "a separate financial products safety agency with authority to supervise and examine mortgage companies and financial institutions."
The IBCA continues that such an agency would not have the same kind of holistic view that existing banking regulators have. "The bank safety and soundness regulators have developed practical expertise in balancing the safe and sound operation of FDIC-insured institutions with the need to provide consumers protection from unfair and harmful practices, and this perspective should not be lost. Without attention to safety and soundness, the agency is likely to promulgate burdensome regulations that make many safe financial products...unobtainable or too costly to offer." TowerGroup's analysts issued a joint statement on the impact of the proposed overhaul. Although they agree with the concept of modernizing the financial regulatory system as a whole, they also find gaps. For instance, TowerGroup says the Administration's proposal seems to focus more on regulating and supporting the largest financial institutions. It "says little about smaller banking institutions, including community banks, savings institutions and credit unions that have continued to lend to consumers throughout the liquidity crisis."
Aite Group's Nancy Atkinson, a senior analyst with the firm, agrees, telling BS&T, "This plan is clearly slanted towards applying greater demands and controls on the largest financial institutions. These institutions should expect regulatory requirements for more scrutiny, more data, more frequent reviews/exams, more comprehensive reviews/exams, more intrusive reviews/exams, and a greater quantity and depth of reporting to the regulators."
In that same vein, TowerGroup also notes "the elimination of the thrift institution charter (which requires institutions to hold a larger share of assets in mortgages) and conversion of thrifts to banks within three to five years could reduce funding for mortgage lending by the very types of institutions that have had more stable loan funding liquidity during the credit crisis."
On the plus side (for banks, at least), Atkinson comments that a number of loopholes would be closed by the proposed plan, including gaps in the regulatory oversight of thrift holding companies, industrial loan companies, credit card banks, trust companies and grandfathered "non-bank" banks. "The banking industry will welcome the leveling of the playing field in this regard," she says.
Banks, especially the largest ones, will no doubt have much on their plate with regard to the further regulatory burden. Therefore, it follows that they will rely on technology to help them cope. This could present an opportunity for the industry's technology vendors, according to Atkinson. "My expectation is that banks will be looking to vendors to provide off-the-shelf or ASP solutions to assist with gathering and monitoring the data required for the heightened reporting, reviews and exams," she relates. "Of course, one of the challenges is that vendors may still need to do the development for these services as the specifications evolve."
David Sherriff, COO of Microgen, a financial risk management software company, agrees that data management will be key for banks' compliance efforts in the new regulatory climate. "Firms will need to access, analyze and report on financial data in new and potentially complex ways," Sherriff notes. "Ultimately, this means financial firms will have to adopt an entirely new set of tools. And though many hear 'regulation' and think 'cost,' smart organizations will see the coming regulatory shift as a chance to create competitive advantage from increased transparency, a clearer view of financial risk and far greater agility."
He also told BS&T that this greater emphasis on transparency and accountability can only have positive effects in all sectors, particularly those areas of financial services which have "lived outside the margins of regulatory influence," as noted above.
One further point to note from TowerGroup's assessment of the Obama proposal was that the consumer watchdog group may potentially be charged with, not only overseeing payments, but also the networks.
"TowerGroup believes the enhanced regulatory authority proposed for the Fed, as well as the creation of the Consumer Financial Protection Agency (CFPA) would place institutions under pressure from both the institutional and customer sides. This pressure would continue to aggravate and accelerate internal industry pressures mandating more conservative lending practices along with less reliance on off-balance sheet loan accounting. In addition, the CFPA would explicitly have jurisdiction over payments, which could include not only products (debit, prepaid), but networks."
For more commentary on how the Obama plan would impact financial services technology, see Burden of Responsibility for New Era Reg Compliance Ultimately Will Fall on IT.