Wavering Optimism in a Post-Reform World

Uncertainty abounds.

Whereas our last quarter’s survey of financial executives pointed to a positive uptick in optimism, more recent responses show that financial company execs are now less sure of their footing. Only 15% of bankers surveyed said they believe the U.S. economy is poised to improve in the next six months compared to a whopping 45% in May 2010. More notably, 25% said they feel the national economy will worsen, compared to only 11% who felt that way late last spring. In a related question, 51% believe that a double-dip recession could occur. Factors contributing to this decrease in optimism likely include government spending levels, rising unemployment, the European debt crisis, and the fall in mortgage lending rates.

Similar changes of heart were noted when executives were polled about their local economies. Whereas last quarter we noted an increase in optimism compared with executives’ responses late in 2009 (35% compared to 22%), this time around only 18% believe their local economies will improve. Again, even more telling, the number of bankers who now believe their local economies will undergo future downturn increased to 20%, compared to only 9% who felt that way at the end of the second quarter.

High anxiety over regulation.

Last quarter, we reported that impending regulation far outweighed other issues in a list of top concerns. Our latest results show similar findings, with worries over compliance held by even higher percentages of bank executives-fully 92% rated it as a top concern, compared to 88% last spring. When we drill down further, we note higher levels of anxiety coming from institutions more than $500 million in assets and from those who are mutually owned and regulated by the Office of Thrift Supervision. Those with slightly lower levels of regulatory concern were respondents from banks with less than $500 million and those regulated by the OCC.
Top Concerns Over the Next 12 Months

  1. Burden of pending regulation
  2. Exposure to commercial real estate losses
  3. Retention of quality talent
  4. Exposure to commercial loan losses
  5. Increased scrutiny of compensation

Dodd-Frank hits home.

In the wake of the Dodd-Frank overhaul legislation, we asked bank executives which provisions would have the most impact on their financial institutions. The provision that touched the most nerves was the creation of the Consumer Protection Agency as a branch of the Federal Reserve to write and enforce rules over mortgages, credit cards, and other types of financial products. Similarly, bankers felt new Federal Reserve rules on interchange fees paid to merchants and retailers to banks that issue debit cards would have a high level of impact.

Top Five Provisions Rated by Level of Impact

  1. Consumer Protection Agency
  2. New rules on interchange fees
  3. Risk-retention requirements on loans
  4. Regulation of derivatives
  5. Volcker rule on proprietary trading

Reform’s lasting effects?

While for many, financial reform is a hard pill to swallow, the hope is that its effects will prevent future crises and the need for future taxpayer bailouts. We asked bankers if they believe that the overall reform package will be effective in preventing such events in the future, and their responses were lukewarm at best. Fifty-two percent said reform would only be somewhat effective in detecting the broad risks to the financial system, and fully 46% did not believe it would be effective at all.

Evaluating compensation-now what do we do?

There has perhaps been no greater spotlight on any one issue as a result of the financial meltdown than that of executive compensation. Since that time, shareholders, legislators, and the media have done little to tone down the rhetoric against high-flying and self-indulgent compensation plans, such that nearly every company’s board has had to address the issue one way or another in the past year. We asked financial company executives how they planned to address incentive compensation plans in light of recent guidance from federal banking regulators. The results show that 33% have or will be instituting corporate governance policies surrounding incentive compensation; 27% say they have or will make changes to their plan. Seventeen percent say their bank’s internal auditors will be taking steps to ensure there is not excessive risk taking, and 6% will begin using nonmonetary rewards as incentives. Fully 46% say things are fine as is-they are not making any changes to their current compensation plans.

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