Musings On Markets
50 billion in possessions pay a fee. In tandem, it reduces the Fed’s crisis lending capabilities and helps prevent bankers from creating a say in who reaches be a Fed president. ANY OFFICE of Thrift Guidance shall cease to exist and the Given will keep oversight of community banking institutions. The Volcker Rule: The rule restricts banks from trading using their proprietary capital and from investing more than 3% of the capital in hedge or private equity funds. In addition, it limits banks from bailing out hedge funds they have spent their capital in.
Derivatives: Standard derivatives (on forex, interest rates etc.) need to be exchanged on exchanges and supported by clearing homes, with standardized capital and margin requirements. Banks can still create customized derivatives for clients, but only in restricted circumstances. Banks have to produce separate entities for their swap business.
Consumer Agency: There is a new federal agency (Consumer Financial Protection Bureau) that is meant to safeguard consumers from scams/misinformation in financial company products (including home loans) by regulating the products and enforcing the rules. Investor safety/ power: The SEC can set standards for brokers who give investment advice and keep them to the same fiduciary responsibility requirements already regulating investment advisers.
Hedge funds and private equity funds have to join up as investment advisers and offer information on deals. Securitization: Banks that package resources and securitize them must keep 5% of the credit risk on their balance sheets. CREDIT HISTORY companies: Allows traders to sue rankings firms for “knowing or reckless” failing in assigning ratings. The reviews are already arriving in.
On the main one hand, there are some who think that this reform is little too, too past due which it’ll do nothing at all to avoid another turmoil. These critics feel that Congress should have returned Glass-Steagall to the written books and split up big banking institutions. At the other extreme, there are some who think that the heavy hand of regulation will destroy the competitiveness of US banks, by making them less profitable and valuable, and move the derivatives and swaps businesses to offshore locales.
Strange though it may seem, I believe that both comparative sides are right on some issues and wrong on others. 1. Will this expenses prevent financial service companies from becoming “too big to fail”? I don’t observe how this bill will reduce the chance that banks will become “too large to fail”.
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50 billion in property and the exemption of smaller banks from some of the regulations – there is certainly nothing in the costs that will prevent banks from becoming larger. In fact, considering that a ton of regulation is going to emerge out of this bill, I will predict that the biggest banks will have a competitive benefit when it comes to playing the “rules” game and get even larger. I will also anticipate that the requirement that banking institutions carve out the swap business and other risky businesses can make them more complex and less clear.
From a valuation standpoint, I am not getting excited about valuing either JP Morgan or Bank of America in a couple of years. 2. Will it reduce “bad” risk taking at banks? 3. Will it make banking institutions less profitable? Interesting question. Initially sight, the answer seems to be yes, since there are limitations on banking institutions buying hedge money and restrictions on their derivatives and swaps businesses.
On a genuine return on collateral basis, they are some of the best come back businesses for banks however they are also the best risk businesses. As an investor in banks, I’ve always looked at these businesses with a jaundiced eye: they earned high comes back but I am unconvinced that they gained high excess comes back (over and above the risk-adjusted cost of equity). Like all legislation, this one is written with the best of motives. I hope it succeeds but I don’t think it’ll.
The accounting concepts that require businesses to accrue loss earlier than they can identify gains could enable taxpayers to use their discretion to decrease the tax base. In contrast, the principal objective of the tax code is to collect revenues to invest in governmental expenditures. To allow the IRS to monitor compliance and collection, the tax laws allows fewer options of accounting methods to determine taxable income than are available to determine financial reporting income.