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Business Costs & Regulation

Your Questions Answered on
the Financial Reform Bill

Here’s a good idea on how the bank overhaul will affect businesses and individuals.

Count on the far-reaching financial overhaul bill becoming law later this month. Senate Democrats appear to have the 60 votes they need to send the measure to President Obama for a triumphant signing session.

The measure cuts a wide swath, giving broad power to Uncle Sam to protect consumers and discourage banks from engaging in risky behavior. Its key elements: The government gains authority to seize big troubled firms before contagion spreads. The largest banks must increase their reserves so they will be less vulnerable in economic downturns. And several agencies acquire more power to police lending, new financial products, derivative trading and so on.

But it’s more a start than a finished work. A vast number of details are left to regulators. How they write more than 350 rules in coming months and years…and how they and future administrations decide to enforce them…will make a world of difference. “We’ll be up to our eyes in regulatory battles for at least the next five years,” says Cam Fine, president of the Independent Community Bankers of America.

The goal is to prevent another crisis like the one that hit the financial system in 2008. Of course, no law can guarantee that…not as long as greed, fear and risky behavior remain part of human nature. But the legislation will add early warning systems, shock absorbers to smooth out bumpy roads and more orderly escape routes.


Though many questions must await regulators, we can tackle some now. Here are 15 of the biggest:

1. Will some banks still be “too big to fail”?

No question. Financial behemoths whose collapse would wreak havoc on world financial markets will always be around. But they’ll be forced into less risky behavior. And a government council under the Treasury Department will have enormous power to act prophylactically…shutting down a firm in a clean, orderly fashion before collateral damage gets too high.

2. If banks have higher capital requirements, won’t loans be tougher to get?

To some degree. Any dollar put aside to cushion future losses is a dollar that can’t be loaned to a business. In that sense, the change could delay a return to a more normal credit climate. Still, the slow phase-in will limit immediate pain.

3. And bank profits will be hit by the new restrictions, right?

Not by much. The bill doesn’t go nearly as far as banks feared, restraining their operations but not dismantling them. The proposed Volcker rule, for example, was watered down to include a curb, rather than a ban, on banks using their own capital to make trades, and even that is phased in. Look for most banks to hike fees to make up lost profits. Still, a couple of banks -- Goldman Sachs and JPMorgan Chase -- face particular challenges.


4. Are hedge funds going to be reined in?

To a limited extent. They will need to register with the Securities and Exchange Commission and provide information on their trades so regulators can try to track their financial health. Same goes for private equity funds.

5. Will derivatives be less of a threat?

Yes. At least the risk will be spread out. Most trading moves to public exchanges, and banks must turn over some trading to separately capitalized subsidiaries, though there are exceptions.

6. Will the law crimp a housing recovery?

No, but it’s going to be slow anyway. The easy lending days are gone. Borrowers will have to prove their ability to repay, and lenders will have to be more forthcoming about how high mortgage rates can reset. Banks that bundle loans and sell them will have more skin in the game -- they’ll have to retain 5% of loans made. More paperwork spells some additional cost.

7. Why didn’t lawmakers include some reforms of Fannie Mae and Freddie Mac?

Much too controversial. Congress put that off until next year. Stay tuned.


8. Does the new consumer protection agency have teeth?

Yes, sharp ones, but much will depend on the rules the new body writes and how it enforces them. It will be a year or two before the agency is even set up. Though it’s under the Federal Reserve, it has its own budget and authority over everything from credit reports to mortgages. Expect the agency to crack down hard on predatory lending, hidden fees and payday lending practices. Auto dealers are exempt, however. And small banks will get to keep their current regulator, though they’ll have to toe the same line as the bigs.

9. How tough is the new law on small banks? Much less than for the big guys.

Smalls escape one capital requirement that would be onerous for them, but a new debit card rule will sting, even though they don’t have to comply with it. The Federal Reserve gets authority to set caps on fees big banks can charge merchants for card transactions. Smalls worry that as bigs are forced to cut fees, they’ll have to as well.

10. And small businesses won’t be affected much, either?

Probably right. The pros and cons for them will likely balance out. The debit card regulations will benefit retailers, though the tightening of credit markets will hurt. Other effects will be indirect, and we can’t know them until the regs are written.

11. Are insurers affected?

Yes, which may mean jurisdictional squabbles. A new unit under Treasury is assigned to recommend ways to improve regulation and monitor large insurers for signs of trouble (think AIG). Today, it’s the states that mostly regulate insurers, and firms fear conflicting rules and lots of red tape.


12. Any impact on investors? Only tangentially.

The bill was never intended to offer protection for investors, though increased disclosure should be a positive. Knowing more about what hedge funds are up to could be a plus, for example. And, obviously, if the bill helps prevent a meltdown, that’ll be good news for investors. (Read more in What Investors Should Know About Financial Reform.)

13. What about competition overseas? Will American firms be at a disadvantage?

Well, the new law sure won’t help them. It will hurt U.S. banks, for example, because their foreign competitors won’t have the cost of divesting their hedge funds or curtailing proprietary trading. But the transition period (up to a dozen years) will mitigate the effect. A bigger problem may be the European Union’s regulations that make U.S. hedge funds operating in western Europe provide more information than U.S. regulators require. Longer term, this divergence in regulatory approaches will be a huge headache, forcing multinational firms to comply with multiple rules.

14. Anything else worth pointing out?

The law allows banks to pay interest on business checking accounts, which is currently banned. Deposit insurance gets hiked permanently to $250,000 per account. The SEC gains more authority to force firms to let shareholders nominate candidates for boards of directors. States get power to regulate national banks if they think the feds aren’t doing enough.

15. So, bottom line, the legislation will slow the economic recovery?

In the short term, yes. Less credit will obviously be a drag on the economy, though the gradual phase-in of most of the bill’s provisions will mitigate the harm. Longer term, the economy should benefit from the reduced risk and protections written into the bill to guard against another round of contagion. (More detail in Financial Reform a Plus for the Economy.)

Richard DeKaser, Jeffrey Kosnett and Richard Sammon contributed to this report.