Not long after President Obama signed the Dodd-Frank Act in July, the consulting firm Accenture surveyed bankers and other financial services executives on their reaction and the impact it might have on their business.
Given the industry's overwhelming opposition to many provisions in the sweeping new law, the results were predictable: 70 percent of the survey participants said they expect compliance costs to increase, 60 percent said they would need to cut other expenses to meet profit targets, and 61 percent said they would have to reassess their long-term business strategies.
Yet the survey also revealed that many bankers still think that, despite the added expense, the law won't put them at a competitive disadvantage. Most-33 percent-expect the impact on their business to be neutral, while 27 percent predict that they will ultimately gain market share. Only 4 percent said regulatory reform might significantly weaken their competitive standing.
To be sure, this bill is going to sting. At large banks in particular, profitability is likely to be severely impaired by strict new capital requirements, limits on proprietary trading and investments in hedge funds, and reduced interchange fees on debit card transactions. And though banks with less than $10 billion of assets were spared from some provisions, the American Bankers Association estimates that they will ultimately be contending with 5,000 pages of new rules, resulting in "massive" new costs.
Still, the final version contained a few items that could help small banks better compete against their big-bank counterparts.
A provision that finally lets banks pay interest on business checking accounts could be a boon for attracting and retaining customers. Another measure eliminates restrictions on interstate branching, which allows banks to expand across state lines more easily. As with much of the legislation, experts say both of these potential benefits have their downsides-banks will be paying for deposits that had been free, and local players will not enjoy the same franchise value as before. But they generally expect these changes will prove to be a positive for most.
On the regulatory front, the creation of a new council to oversee federal regulators could put an end to agency "turf wars" that factored into increasingly harsh examinations over the last couple of years. Even the creation of a new consumer protection bureau-arguably the most despised measure in the entire 2,300-page bill-could help banks better satisfy their customers' needs and, thus, improve profitability.
For publicly traded community banks, perhaps the biggest victory was a permanent exemption from what many have viewed as an onerous provision of the Sarbanes-Oxley Act of 2002: the requirement that chief executives sign off on company audits.
Publicly traded companies whose market capitalization is valued at less than $75 million have won numerous extensions from complying with section 404(b) of Sarbanes-Oxley, which requires an outside auditor to assess management's internal control over financial statements. The Dodd-Frank Act exempts them for good. The measure affects hundreds of banks and could save them tens of thousands of dollars a year in compliance costs, says Karen Thomas, the vice president of government relations at the Independent Community Bankers of America.
One of the biggest surprises in the legislation was the provision inserted during House and Senate negotiations that lets banks pay interest on business deposits.
Many community banks have been clamoring for this for years, arguing that they need to pay interest on commercial accounts to be competitive. Though sweep accounts help get around the ban on paying interest, the process can be so cumbersome and so loaded with restrictions that most would simply prefer to pay the interest directly, says Stephen Wilson, the chairman and chief executive at LCNB Corp. in Lebanon, Ohio.
For his company to avoid exceeding the sweep limitations, "a lot of software had to be written and a lot of safeguards have had to be put in," says Wilson. "This is just simple and clean."
Wilson acknowledges that some bankers will not be happy about having to pay out more in interest, but warns that the holdouts will struggle to hang on to valuable business customers. "Companies are savvy enough that they are not going to let money sit idle and not earn interest if they have excess cash."
The measure to allow unfettered branching across state lines is more of a mixed bag. Banks in slower-growth markets largely support the measure because it permits them to move into faster-growing markets without having to buy a charter first. The flipside is that banks in those markets face more competition. Plus their franches values could be lowered because other banks moving into their states might no longer see them as potential targets, says Peter Weinstock, a partner at the law firm Hunton & Williams.
The industry considered it a plus that Congress didn't create a stand-alone consumer protection agency, as initially proposed. Banks with less than $10 billion of assets will be exempt from direct oversight of the new Consumer Financial Protection Bureau, which will be part of the Federal Reserve.
Still, the bureau will set the rules on the types of products and services all banks can offer.
Jan Miller, the CEO of Wainwright Bank and Trust Co. in Boston, is not happy about the idea, even though he leads a socially progressive institution that champions community development and affordable housing. "I never made an option ARM my entire career," says Miller, referring to the adjustable-rate mortgages that got so many borrowers into trouble. "If I'm going to pay the price on those that did, by putting restrictions on the kinds of products I offer, that's not going to help me."
If Miller, whose company recently announced it was selling itself to Eastern Bank Corp. in Boston, sees any good in the new bureau, it's only that it could forever eliminate the predatory lenders who subverted Wainwright's mission. Banks saw an uptick in mortgage and consumer loan business after the financial crisis pushed some nonbank competitors out of business, and further regulation of these firms could drive more traffic to banks, several observers say.
Chris Thompson, head of Accenture's global financial risk management practice, says he is advising bankers to try to make the most out of new reporting requirements to be mandated by the bureau. They will likely have to invest in data analytics software to meet these requirements, but Thompson says banks can benefit from using the new data they gather to better cross-sell customers and increase wallet share.
The bureau also will be charged with working out some of the maddening conflicts between various regulations, which some observers say will give banks much-needed clarity. One example is the conflict between the Fed's Truth-in-Lending enforcement and recent changes to the Real Estate and Settlement Procedures Act that bankers say have led to delays in closing mortgages. It will be up to the bureau to write guidelines to clear up the confusion.
"What financial institutions need is predictability," says Ernie Patrikis, a partner at the law firm White & Case and a former general counsel at the Federal Reserve Bank of New York.
A more welcome change bankers might see once the new law takes effect could be a lighter touch from examiners.
Many industry insiders contend that regulators have been too aggressive with community banks over the past few years. They complain that examiners unfairly force writedowns and chargeoffs, overreact to minor issues that never got flagged previously, and hand out regulatory orders requiring even well- capitalized banks to increase their capital cushions.
Walter Moeling, who co-manages the financial institutions practice in the Atlanta office of Bryan Cave, says the worst enforcement excesses could subside soon. Instead of having to satisfy harsh decrees from Washington, the regional offices for the federal regulatory agencies should regain some flexibility.
"During this legislative debate, the various federal agencies have been at war with each other and the state agencies for turf," says Moeling who, working in one of the most stressed regions in the country, saw the regulatory crackdown up close. "That turf war is now over. Congress has decided, and they can quit fighting with each other and trying to compete as to who's the toughest regulator and get back to rational regulation."