The Brown-Vitter bill proposes to break up the big banks. There is a proposal to bring back the Glass-Steagall Act, which separated commercial banks from investment banks. With lots of pending legislation and new, as yet-unwritten rules coming out of the Dodd-Frank Act, Bank Director magazine decided to talk to Brian Gardner to get a sense of how much of this legislation is really going to pass and when to expect finalization of some of the new banking rules. Gardner is senior vice president of research in Washington, D.C., for Keefe, Bruyette & Woods, a division of Stifel Financial, and he spoke to Bank Director magazine at the end of June, shortly before publication of the final Basel III rules.
A shortened version of this interview appeared in the third quarter issue of Bank Director magazine.
What is the mood now in Washington?
There is little chance the Brown-Vitter bill will pass. There are a number of senior Democrats who have been critical of big banks that are not supporting it. Legislation has two purposes: To pass and change policy, or to move legislators in a certain direction. The timing and reaction to the bill coincided with an overall movement in regulatory circles questioning how successful Dodd-Frank was in ending too-big-to-fail and what else needs to be done. I think you see an environment in Washington which is more favorable to smaller banks and less favorable to large banks. That is not to say Washington or the regulators have turned into a bunch of small bank advocates. I hear from bank managements regularly on the problems and challenges they have of dealing with regulators. I don’t take issue with any of that. My observation is a relative one. Certainly compared to larger banks, the rules are being geared toward smaller banks in a more favorable light.
What’s the evidence of that?
In Dodd-Frank, the Collins amendment eliminated hybrid forms of capita called TRUPS [trust preferred securities] from being included in Tier 1 capital, but grandfathered banks under $15 billion in assets. Community banks had a lot of problems with the original Basel proposal that changed risk weightings for mortgages. Aside from requiring banks to hold more capital for mortgages, just the complexity of the added calculations for capital was tougher for smaller banks. I think regulators will drop that from the proposal, so at least on the margin, it will be more favorable to smaller banks. [Editor’s Note: Gardner was right. After he spoke to Bank Director magazine at the end of June, the Federal Reserve Board came out with a revised final Basel III rule that dropped the controversial risk weightings for mortgages. The revised final Basel rule also grandfathers TRUPS for banks below $15 billion in assets.]
What, in your view, is the banking regulation that is going to have the largest impact on banking?
Finalization [of these different rules] would have the biggest impact right now. As for Basel, banks are already gearing up to make sure they can deploy capital effectively. At least they can get some clarity, finally. Sometimes, it’s not whether it’s a bad rule or a good rule, it’s just a matter of knowing the rule. On the Volker [Rule], we’ve been waiting for two years now and it is supposed to be done by year-end. But these are deadlines that have been missed regularly. The big banks were already spinning off their proprietary trading desks well before the Volker rule [was written to ban big banks from proprietary trading]. I’m not convinced the Volker rule will have the impact that people think it will, because I think it’s largely been implemented already by larger banks. I don’t expect to get a lot of clarity on risk retention and QRM [qualified residential mortgages] over the next couple of months. The debate over [the future of] Fannie Mae and Freddie Mac will go on for years. That debate is getting started right now.
How are investors seeing the banking industry right now?
Clients I talk to are more predisposed to the smaller banks because of regulatory issues. It is but one factor. The rules that tend to be more pro-consumer, such as the Credit Card Act a few years ago, create barriers to entry and make competition less likely. The larger credit card companies are consolidating their hold on the industry. From an investor standpoint, regulation is not always a negative [for all companies]. It can also be a positive and I think that’s the case in the credit card space. In the end, though, I think it’s monetary policy rather than regulatory policy that is driving the view of banking right now.
Originally published on August 5, 2013.