Since the housing downturn and 2008 financial crisis, the bank industry in the United States has undergone considerable change. Still, the process of remaking banking into a more stable, stronger, and more customer-friendly business isn’t finished yet. There are a host of issues that bank regulators and Congress are likely to tackle in 2013.
One topic much in the news recently is the controversy over the proposed extension of the Transaction Account Guarantee (TAG) program. The program was established by the Federal Deposit Insurance Corporation in 2008 to provide insurance for noninterest-bearing checking deposit accounts that exceed the $250,000 deposit insurance limit. The emergency measure’s goal was to maintain adequate liquidity in the banking system during the financial crisis.
The program was extended twice until the end of 2010, and then for another two years under the Dodd-Frank Wall Street Reform Act. As of this writing, efforts in Congress to extend TAG have failed. The issue probably will resurface in early 2013. Community banks, in particular, fear the loss of business deposits if TAG insurance expires.
In early 2013, bank regulatory agencies also hope to finalize provisions of the Volcker rule, named for former Federal Reserve chairman Paul Volcker. The rule, which prohibits banks from trading for their own account and limits private equity investments by banks, had been scheduled to take effect on July 21, 2012, but it has taken longer than expected to work out the details. The rule is fiercely opposed by the bank industry, which points out that proprietary trading didn’t cause the 2008 financial meltdown.
The final version of the rule requires approvals from the three bank regulatory agencies (the Federal Reserve Board, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation), as well as the Securities and Exchange Commission and the Commodities Futures Trading Commission, with three of these entities agreeing on the same version of the rule. That sounds like a tall order, but memories of JPMorgan’s (JPM - Free JPMorgan Stock Report) trading fiasco last spring could pressure the five to work together to iron out the details in 2013. Still, the rule may not be fully enforced until sometime in 2014.
In addition, some have suggested that the move to break up big banks could gain support in the year ahead given the Democratic Party’s wins in the November Presidential election. The thought here is that due to their size, large banks have a hard time properly managing risky situations, which could lead to future bank bailouts by taxpayers and pose risks to the financial system. However, we think breaking up a big bank, which would be extremely complicated and costly, would be unlikely to happen. Instead, a current push to limit the growth of big banks, including via acquisitions, may have more success. Rules to more closely regulate foreign banks that operate in the United States, many of which are larger than the biggest banks stateside, are also under discussion.
At the same time, helping small banks become more competitive probably will get a lot more attention in 2013. Community banks object to a one-size-fits-all approach to bank regulation. Most confine their activities to conventional lending and deposit-taking, and don’t engage in risky trading. The small and midsized banks also have more limited backoffice resources to handle regulatory issues. Helping small banks survive may also help reduce the concentration of bank industry assets at big institutions. New regulations could be phased in more slowly for the community banks than for big banks, and some new rules might be tailored for small banks.
Meanwhile, there’s a lot going on in the mortgage business. Mortgage lenders are waiting for the Consumer Financial Protection Bureau to issue its definition of a “qualified mortgage”, including standards for determining a borrower’s ability to repay loans. During the housing crisis, banks were criticized for lending too freely. Lending standards are now much tighter, since banks fear that they will be required to buy back mortgage loans that go bad. Banks now have to make sure that borrowers are able to repay loans. To encourage banks to lend, loans to borrowers that meet yet-to-be-defined qualified mortgage standards would be exempt from that rule. But banks seek assurance that they would be protected from lawsuits challenging foreclosures involving qualified mortgages.
Also under consideration is a requirement that issuers of mortgage-loan backed securities retain some of those securities. The thought is that having some “skin in the game” will discourage bond issuers from including risky mortgages in the mix of loans that back the securities. Meanwhile, efforts to privatize government-sponsored mortgage giants Fannie Mae and Freddie Mac, as well as to reform the Federal Housing Administration, may gain ground in 2013, although the two initiatives probably will take a number of years.
In all, many of the financial reform measures proposed in the aftermath of the 2008 financial crisis may move closer to becoming law in 2013. Although the bank industry may not welcome the resulting increased regulation, a better-defined regulatory landscape probably would make it easier for banks to operate.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.