Today at TILE we talked about new financial regulation and how all the rules coming out of Washington will play out in the financial sector. What are all the new rules? Will they make banks and bankers act differently in the future? And is this good or bad for consumers of financial services?
As with any new legislation, the devil is in the details. Even the experts are trying to figure out exactly what is included in the new regulation bill. That being said, there are a few big categories: First, there’s the creation of the Consumer Finance Protection Agency. This agency will coordinate, review, and oversee financial rules related to consumers. Second, the Volcker rule (named after former Fed Chairman Paul Volcker) limits a bank’s ability to trade for its own account (aka proprietary trading) and limits the amount a bank can use for investing in private equity and hedge funds to 3% of capital – implying that banks should be focused on serving their customers versus making large bets for their own profit.
Third, more derivatives will need to be cleared through an exchange versus over-the-counter. In other words, there will be less trading permitted “behind the scenes.” Fourth, the SEC is going to review the standards and responsibilities of financial services providers. As a result, there will likely be increased legal obligation and responsibility for those servicing clients.
Does this mean banking will be boring again? Hardly. As someone said to me last week, the best way to create innovation in financial services is to give bankers a new rule to follow! In other words, the history of financial innovation (the creation of new ideas, new products, and new ways of doing things) stems from bankers finding ways around rules and regulations. Haven’t you done the same thing when your school or parents created a new “guideline?” You don’t want to break the new rule outright, yet you really want to find a new way to get what you want. Bankers feel the same way, and what they want is to make money.
The new regulations raise all kinds of questions. If banks are only allowed to trade/ invest 3% of their money, then what will they do with the rest of the money they earn? Ideally, the government would like to see banks return their focus to lending it to individuals and businesses – the more they make money available to those who need it, the higher the probability that money will be invested (e.g. in a new home or business) and lead to growth in the economy. The regulators also want to make sure the banks hold on to more capital as protection – or a “cushion” – in case there is another meltdown. That being said, it is very likely banks will look to invest in new businesses and new locations. For example, if you are told you can’t spend any more money at the iTunes store, does that make you want to stop buying music and start investing in school textbooks? Probably not – you’ll find new ways to spend your money the way you want.
Will the new rules make banks get bigger or smaller? And are you likely to see more or fewer banks around town? For a while, it is likely we will see the big banks getting bigger… it costs an awful lot to be in business and, for the most part, the new rules were written for the larger banks. Many smaller banks say they can’t afford to put all the new regulations into place. That being said, I believe that over time we will see a few large banks (that most likely will be slow to change) and a collection of smaller, nimbler financial institutions. It is a cycle that is tried and true. The small financial firm of today may actually be the big bank of the future… however far into the future that may be.
So what does this mean for the TILE Community? Short-term, be prepared to see fees increase for all kinds of banking services – how much are you charged when you take money from the ATM? Is there a monthly or annual fee to just have an account or credit card? We often hear how surprised people are when they realize how much money is being taken out of their account just to pay these fees – if you only have a hundred dollars in an account, a $20 per month service fee can be a big deal. While we aren’t suggesting you go back to keeping money in a shoe box, we do think the TILE community will benefit from understanding how and when they are charged and what percentage of their money is being used to pay bank fees. Longer-term, and especially for those thinking of studying or starting a career in finance, be prepared for new products (and new pitfalls). The same way our economy moves in cycles, so too do the fortunes of financial institutions – and the effectiveness of financial regulation.
- Amy