By Shameka Simmons, Banking Attorney, Financial Solutions, Harte-HanksTrillium Software
Shameka Simmons is a Banking Attorney with Harte-Hanks Trillium Software. She offers a wealth of knowledge about the inner workings and processes of financial institutions, retail/commercial lending, and complex loan transactions. She gained this expertise through her experience at GMAC (now Ally Bank), the Legal Division of the FDIC Enforcement division, and her active role in the Illinois Attorney General subpoena/investigation of Countrywide at the height of the foreclosure crisis.
Despite the recent financial crisis and mounting litigation against banks due to mortgage-backed securities, global banks are somehow overcapitalized and less leveraged. The burning questions are “how and why?”
I think I might be able to answer these questions in one word…REGULATIONS!
Yes, I said regulations. Even though most of the domestic regulations from Dodd-Frank are still in-the-making, and Basel III has yet to be promulgated, banks already understand the expected regulatory capital thresholds for domestic and global standards, but absolutely no idea as to how they will be applied. I opine that banks are holding extra capital because they are truly uncertain of what the future may bring, relevant to regulations.
In particular, banks are dreading the designation of systemically important financial institution (SIFI) by regulators. If designated as a SIFI, a bank will face even more capital requirements (such as capital buffers) due to the risk it poses to other financial institutions and the overall economy.
So, can regulatory uncertainty actually be a good thing? If regulatory uncertainty causes banks to tighten their purse straps and reduce lending, it’s probably not a good thing due to the impact it has on the economy and consumer spending. But, if it forces banks to better prepare for crisis by maintaining additional capital beyond the current regulated requirement, and make them more risk-averse when pursuing opportunities, then it is an EXCELLENT thing…for regulators…but not so much for the banks, as the money could be utilized for other purposes.
Need I say a double-edged sword?
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