BankThink

Community banks' prospects will improve if they accept that the financial services industry is changing. They must re-examine strategies and business models, and experiment and improvise to exploit new opportunities.

Reforms of recent years appear to be working and the Federal Housing Administration’s worst financial days appear to be behind it. Time for the agency to return to its mission.

Receiving Wide Coverage ...Downsizing After Volcker: In what the Journal pegs as an "unforeseen consequence" of the recently released Volcker Rule, more than a dozen small and regional banks will likely need to sell collateralized debt obligations. Case in point: Zions Bancorp, which said it would take a $387 million charge to get rid of a large CDO portfolio, as a result of the Volcker Rule's treatment of CDOs comprised of trust preferred securities. "The unexpected announcement by Zions … is an indication that the impact of the Volcker Rule will not just be felt at traditional Wall Street firms but at other kinds of banks as well," echoes Dealbook. JPMorgan Chase, meanwhile, is selling an Asia-based principal investment business, valued at more than $1 billion. Potential buyers include Blackstone, Carlyle and KKR. According to the FT, "while the operation … does not directly fall foul of the new Volcker rule restricting proprietary investments, bankers at JPMorgan say it is only a matter of time before regulators may decide it is a risk-taking business." The FT also reports that Citigroup and Santander have sold $1 billion of trade finance assets in a securitization, though that sale is attributed primarily to new Basel capital rules, which "hurt the profitability of assets that banks would have typically held."

The industry has moved from a traditional customer-oriented banking model to a transactional and counterparty-oriented model. This change has contributed to an operating environment in which the opportunity for abuse and deception has increased.

If the banks do not want to divest from these fringe consumer finance companies, the OCC should make them do so. Their reputations are at risk.

Receiving Wide Coverage ...Yes, Virginia, There is a Volcker Rule: Columnists on both sides of the pond spent the weekend parsing the true meaning of the Volcker Rule, now that U.S. regulators have finalized it. Echoing a piece in American Banker last Tuesday, Gretchen Morgenson concludes in the New York Times that with so many aspects of the measure still open to interpretation — like, um, is this activity an endeavor in approved market making or a thinly veiled attempt at proprietary trading — the success or failure of Volcker "will depend upon the appetite of financial regulators to regulate." So how hungry are the regulators, exactly? That remains unclear. For now, Morgenson argues, Volcker's real gift is a "long overdue" discussion about regulatory accountability. Over in the FT, meanwhile, John Authers opines that having "more qualitative judgement by regulators should work far better" than the useless prescriptions of Basel II (see: 2008 global financial crisis). But that's if regulators can avoid being "outfoxed" by their more handsomely compensated counterparts in the banking sector, he notes.

The Federal Deposit Insurance Corp. plans to use Dodd-Frank's "orderly liquidation authority" to dismantle a troubled megabank, but experts worry the single-point resolution may be perceived as a stealth bailout by the government.

Federal regulators added a final rule that exempts certain mortgage loans and refinances from appraisal requirements established under the 2010 Dodd-Frank reform law.

A recap of the informed opinions (and the discussions they generated) on BankThink this week.

Receiving Wide Coverage ...Efforts to Cool Bitcoin Fever: The European Banking Authority, which has previously raised concerns with risks tied to virtual currencies such as Bicoin, issued a statement on Friday warning of the possibility of "violent fluctuations in electronic currencies" value and the danger of "digital wallets" being hacked. European authorities argue that consumers should be aware the industry is unregulated and will not be protected. The warning comes after the Bank of China last week restricted its own financial institutions from using Bitcoin as a currency. Financial Times, New York Times