Dodd-Frank: Who’ll Pay for New Regs?
A year into the process, the act impacts the business models of financial institutions. Will their results hold up against compliance costs and capital requirements?
Thomas P. Gibbons, vice chairman and CFO of BNY Mellon, says he understands the need for regulators to get the 243 rules, to be written under the Dodd-Frank Act, right the first time around. But he is also hoping that these regulators get moving.
“We’d love to [spend the time to] get it right, but we’d also love to get rid of the uncertainty,” he said at a panel discussion at the Securities Industry and Financial Markets Association (SIFMA) Dodd-Frank Impact Analysis summit, held in New York. “Obviously we need good accounting standards and we need good capital standards, but we’re trying to do an awful lot in a short time.”
Indeed, uncertainty is probably the only Dodd-Frank impact of which financial executives may to be certain, as regulators thrash out the particulars of everything from centralized clearing for swaps and other derivatives, margin requirements for financial and non-financial hedgers and enhanced capital requirements.
“We won’t really know the effect of all this stuff until after we do it,” said Deutsche Bank Americas deputy CEO Donna Milford. “I think it’s fair to say that everyone is going to be impacted,” she said, adding that while all of her company’s customers are going to take compliance cost hits, the biggest “real issue” is going to be experienced by clients involved in financial hedging, who will have higher margin requirements.
As definitions emerge for different types of hedgers under Dodd-Frank, companies are anxiously awaiting word on where their hedging activities fall. While the distinction between commercial hedging – as in the case of an airline protecting itself against jet-fuel price fluctuations – and more-speculation-based financial hedges may seem obvious, the new Dodd-Frank rules may, in effect, require major payers to segregate their balance sheets based on the purpose of each transaction.
The complexities of creating a revamped, centralized clearing market for swaps and other derivatives markets also pose challenges and raise the possibility of higher costs costs, according to Jerry del Meisser, co-chief executive at Barclay’s Capital.
“A lot of businesses saw [centralized derivatives clearing] as an opportunity,” he said at the panel. “Now we’re seeing that this is really, really hard.”
Taking Money Off the Table
Changes in capital requirements are another factor likely to prove costly to the financial sector. As higher Dodd-Frank margin requirements and compliance costs dovetail with Basel III guidelines that will require a 9.5% capital reserve by 2019, the result will be more money removed from the table.
Milford, for her part, points out that all this risk will have to go somewhere. “It if goes to an unregulated part of the economy or to an area that does not know how to manage risk, you’ll find out whether this risk is systemic after the fact,” she said.
But to BNY Mellon’s Gibbons, where the risk migrates to is beside the point.
Ultimately we’re slowing down the speed limit and maybe we’re ultimately going to reduce risk,” he said. “The question is will investors going to drive down their return,” given these slower speed limits. “My answer is ‘No, they won’t do that. You’ll have to lower your stock.’”