Many will say that we are through the grimmest part of the worst financial crisis since the Great Depression, and in many ways they are right. There are glimmers of light on the horizon. However, this is a treacherous part of the cycle for individual firms, the financial services industry as a whole and the economy as a whole.

Punish-the-bankers rhetoric abounds. Though Congress has cobbled together a number of thoughtful reform bills, other proposals may capture the popular imagination and change financial services for the worse. The regulatory pendulum is still swinging in the direction of tougher standards and tougher exams.

There is still not much to "ho, ho, ho" about this holiday season. So what should you expect in 2010 and what should you and the industry do? Let me touch on five matters that deserve urgent attention.

Glass-Steagall revisited: Calls for Glass-Steagall "re-reform" will gain traction in 2010. If the industry does not clarify these issues, this could be a snowball that gains momentum and flattens many companies next year. There are several reasons this is a troublesome set of proposals:

  • Reversing course will have serious institutional and financial sector costs — just when financial firms are slowly climbing back to profitability.
  • Going back to a world where financial services firms are in functional boxes will limit profitability and, ultimately, franchise value.
  • Returning to life before repeal will not solve the "too big to fail" problem. (Bear Stearns, Lehman Brothers, AIG, Fannie and Freddie were not banking organizations and did not fail because of Glass-Steagall reform.)
  • Pressures to lend: It is constructive for government to lay the foundation necessary for banks to be able to make good loans, to call for lending and to allow bankers to use their judgment in this area. Sound lending is not just good for the economy, it is the heart of good banking. However, banks can't get swept up in such a frenzy to make loans that sound lending standards are disregarded.

    The financial crisis has reminded us in no uncertain terms that your franchise depends upon having a book of sound credits. Neither regulators nor the markets will turn the other way if loans go sour, even if they were made with the best of intentions.

    Capital can be too much of a good thing: The current bandwagon for extremely high capital standards is a worry. No sound banker or former regulator can be against a solid capital base for a financial institution. However, current requirements for some institutions to have 13%-plus risk-based capital, 8%-plus tier one capital, and 6%-7% tangible common equity depresses lending, counter to the government's objectives.

    Furthermore, excessively high standards do not promote safety and soundness; in fact, they can make banks and banking less safe and sound, and the industry needs to articulate the reasons. Also, we all have to be wary of indirect increases in capital charges by way of definitional changes that do not alter the numeric targets but have substantial impact on the actual charge.

    Prepare for rigorous exams: Banking cycles have an inexorable rhythm, and this cycle is no exception. As this cycle matures, exams will get harder. I know I sound like a broken record, but fighting with your regulatory agency will get you nowhere or worse. The secret is anticipating what the agency's particular focus is; preparing for the next exam; and solving problems as rapidly as possible. A self-imposed diagnostic and improvement plan along the lines of a memorandum of understanding is generally quite effective.

    Compensation: The anti-bonus drumbeats will continue through 2010. It is unfortunate, but clearly both Main Street and official Washington are angry. Failures on the part of the industry to recognize this reality and find ways to accommodate it will cause worse pain, not less. There is a recipe that will work for Wall Street, and it includes charitable giving, reining in bonuses for at least this year and adopting longer-dated risk-based compensation along the lines of the Fed and FASB proposals. This is not just a Wall Street problem. All financials would be well advised to avoid headline-grabbing bonus payments for at least this year and possibly next.

    I don't mean to sound like the former regulator Grinch who stole Christmas. Financial services executive have a great deal to be proud of after guiding their institutions through unprecedented turmoil. However, as the great bard of home plate used to say, "It ain't over till it's over." And, the financial crisis of 2007, 2008 and 2009 has at least one more year to run.

    Eugene A. Ludwig is a founder and the chief executive officer of Promontory Financial Group LLC, a global consulting firm based in Washington. He was the comptroller of the currency in the Clinton administration.

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