Friday, January 15, 2016

Could Wall St. Reform Be Working? Some Think So.

Screeching to a halt?

I like to think I understand finance, but admittedly I don't understand financial reform, aside from assuming that Dodd-Frank was pretty watered down. It might have been. But apparently there's more there than meets the eye, and things are happened a bit beneath the radar:
Here’s what is happening. One of the provisions in the Dodd-Frank Wall Street reform bill is to identify “Systemically Important Financial Institutions” (SIFI, another way of saying “too big to fail”). Those institutions now have to abide by special regulations, one being that they have to maintain enough capital to cover their risky bets (so that taxpayers are not required to bail them out). Doing so makes them less profitable.
In the banking sector, where policy makers have focused the toughest rules on roughly 30 banks with $50 billion or more in assets, smaller banks with between $5 billion and $50 billion in assets are about 10% more profitable than banks that are above that level, according to an analysis by Keefe, Bruyette & Woods. The shares of those midsize banks accordingly trade at a higher valuation than lenders with $50 billion or more in assets, according to the analysis.
That’s why some of them are downsizing. Next up could be Prudential Life and AIG (whose impending demise is what sparked the 2008 bail-out).
Wow. Imagine dodging the law by cooperating with it. Don't want the legal and financial burden of being deemed too-big-to-fail? Become smaller. Wow.

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