Administration Sees Good Prospects For Quick Passage of Financial Reform

Treasury Secretary Tim Geithner March 25 voiced optimism that Democrats and Republicans will soon agree to pass legislation that overhauls U.S. financial services regulation and establishes a new level of consumer protection. “We’re on the verge of being able to get a very strong bill in place,” Geithner said following a roundtable discussion at the Treasury Department on consumer protection issues facing military personnel and the role that a new consumer financial protection unit might play. “Our hope is, and I think we’re very close, our hope is we’re going to have Republicans join with Democrats in passing a strong bill quickly,” he added.

Regulatory Initiatives Will Add Costs

Separately, a financial services consultant March 25 said a host of regulatory initiatives will also keep banks busy in the coming years. Although regulatory reform legislation is the marquee item at the moment, regulators are working on new capital rules, liquidity controls, securitization standards, and other initiatives that could mean significant new costs, according to Karen Shaw Petrou, managing partner of Federal Financial Analytics, Inc., a Washington, D.C., consulting firm. “Add to it that of the pending legislation, and it could be crushing,” Petrou said in a prepared text of remarks to the University of North Carolina Banking Institute in Charlotte, N.C. According to Petrou, new capital rules could triple or even quadruple requirements now in place, driving returns on bank earnings into single digits. And, among other projects, the Federal Deposit Insurance Corporation is weighing a proposal that could reshape the securitization market, which is already the subject of risk retention provisions in the House and Senate regulatory reform legislation. The FDIC proposal would lift a long-time exemption on securitized assets at failed banks by making those assets subject to seizure by the FDIC. So significant is the FDIC’s proposal that it could overshadow even the pending legislative changes that would require loan originators and securitizing firms to hold a percentage of those assets on their balance sheets, she said. “We’ll await for the next step in the FDIC’s rulemaking process, but it could trump pending legislation that would impose a risk-retention requirement on originators and/or securitizers,” Petrou said.