New game-changing regulations on mortgages and remittances from the Consumer Financial Protection Bureau, as well as new regs from the NCUA and other regulators, have not-for-profit credit unions wondering how they’ll find the resources to comply.
Turns out, their for-profit banking counterparts aren’t finding it any easier to shoulder the compliance burden.
Anna Timone, general counsel and chief compliance officer for New York-based investment firm DIAM USA, said despite accusations that Wall Street has escaped regulatory reform, investment banks are feeling the pressure.
“It’s a shock for our industry,” Timone said. “Regulators used to have a soft, friendly approach. Now, they’re yelling at you for things that were easily forgiven in the past.”
The attorney said her industry also faces general uncertainty regarding current and future regulations.
“The massive amount of new rules being proposed almost weekly brings a lot of instability on many levels,” Timone said.
For investment bankers, new rules that prohibit the use of credit cards to fund accounts for foreign exchange trading has forced them to make operational changes.
“We are almost a cashless society now, so why?” Timone said. “You can put a Starbucks coffee on a credit card, that’s the consumer’s choice. The idea behind the rule is to fight compulsive purchases, but it doesn’t make sense.”
With investment bankers also struggling with new requirements for asset managers to register with the Commodity Futures Trading Commission and the Securities and Exchange Commission, dual registration seems redundant, Timone said.
She also identified as problematic the Volcker Rule, which would prohibit proprietary trading, as a regulatory issue, as well as new fiduciary duties for investment advisers, Basel capital requirements and other proposals coming from Europe.
Like credit unions, Timone said bankers wonder if their regulators are trying to prevent another crisis, or put them out of business.
“The entire financial industry is going through regulatory restructures, investigations, litigations and audits that create a lot of uncertainty for business in the industry,” Timone said. “Of course, it affects a company’s confidence in hiring and they cut costs, business development suffers, and clients are very cautions and waiting for more stability. And then you add in poor markets, a lack of new opportunities, new taxes being proposed and a lot of political uncertainty.”
SEC lawsuits have also affected investment bankers. Timone called the half billion dollars’ worth of settlements collected so far a shakedown by federal authorities.
“What’s sad is a lot of companies are willing to settle right away with the first SEC complaint, rather than defending themselves,” Timone said. “And you don’t even know if the complaint is based upon merit.”
Jill Castilla, executive vice president and chief credit officer of the $270 million Citizens Bank of Edmond in Edmond, Okla., said regulations have also affected her business. Citizens has hired additional compliance staff, utilized compliance vendors and increased compliance responsibilities for existing managers and staff, she noted.
“We’re a small organization, so compliance is required for all of us,” Castilla said. “We use a tiered approach where basic compliance functions can be addressed by manager, even front line staff, and then we have a second tier of dedicated compliance specialists. For issues that require further expertise, we utilize a consultant.”
The community banker said of all the new regulations she faces, Basel III capital requirements are the most problematic. As a community lender, the bank makes a lot of loans outside the box that would be subjected to increased risk weighting under Basel III. Speculative commercial lending would be subjected to particularly heavy risk weighting. Even the typical business loans that banks put on the books would be more difficult to fund under Basel III, Castilla said.
And, unlike other regulations that are applied to business going forward, Basel III would be applied to the bank’s existing loan portfolio. Still, merely raising additional capital isn’t the answer, she said.
“No one is going to assign more capital,” Castilla said. “Instead, we would stop doing loans that would increase risk. In our scenario, we don’t have deep pockets to go to when we need additional capital. Capital is organically grown thru earnings, so we grow capital organically through earnings, not by taking money from a wealthy stockholder. The reduction in flexible loan structures could be damaging from an economic aspect and to small business, especially in smaller communities.”
Castilla said investors aren’t clamoring to invest in banks right now because margins are so narrow and there are significant restrictions placed on distributions on earnings. An investor could go years without seeing returns, she pointed out.
Some have said investors usually want a majority stake in the institution, which means raising capital or merging with another bank to achieve economy of scale, which dilutes current ownership and can significantly alter the culture and investment objectives of an institution.
“Community banks have niches, we know our customers well. When a big bank buys a community bank or merges with one, they can lose that community understanding,” Castilla said. “It’s probably the same challenge a local credit union would experience in a merger or acquisition.”