Tags: Regulators | overdone | it | banks

Regulators Have Overdone it on Banks … Or Have They?

By    |   Tuesday, 28 July 2015 06:00 AM

Regulators have gone a bit too far in cracking down on banks to make them safer, says Debbie Hoffman, chief legal officer at Digital Risk.

"Excessive regulation runs the risk of leaving a fragile economy starved of the capital it needs to grow," she writes in USA Today.

"It is critical that regulatory policy encourages banks to get back into the business of lending again, something they have been reluctant to do in the wake of the financial crisis."

For example, the Federal Reserve adopted a rule last week requiring eight systemically important banks to keep more capital.

"Its purpose is to retain financial stability in the United States in the event of a bank failure. But it may not be doing enough to facilitate lending and stimulate economic growth," Hoffman says.

But USA Today editors disagree. "The Fed’s approach is constructive. The stricter capital rules will give banks bigger rainy-day funds during times of volatility," they write.

"Pegging them to overnight lending will discourage banks from engaging in risky behavior. And, as a total package, the tougher standards might even persuade some banks to break up."

Bankers are correct in pointing out that more stringent capital requirements will curb the economy by curbing bank lending, the editorial says. "But it’s a bit like saying you shouldn’t water the lawn because it will make the grass wet."

Meanwhile, bank stocks have risen smartly over the past year, with the KBW Bank (stock) Index returning 10.6 percent, well above the 6.8 percent return for the S&P 500 index.

And the party isn't over, says Dick Bove, star bank analyst at Rafferty Capital Markets. "Big bank stocks should be bought aggressively," he writes on CNBC.com.

And why is that?

"Let's start with earnings," Bove says. "What is very significant in most of the bank-profit figures being released in the past week is that earnings from operations are . . . jumping."

Then there's asset quality. "The quality of bank balance sheets has clearly been positively impacted by the reduction in problem loans," Bove explains. "In many cases, banks are selling troubled loans at a profit compared to their marked-down values."

Banks' earnings outlook is bright, thanks to solid economic growth, declining expenses, increased merger and acquisition activity and increased trading activity, Bove says. "Most importantly, investment psychology is shifting toward this group."

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Regulators have gone a bit too far in cracking down on banks to make them safer, says Debbie Hoffman, chief legal officer at Digital Risk. Excessive regulation runs the risk of leaving a fragile economy starved of the capital it needs to grow, she writes in USA Today.
Regulators, overdone, it, banks
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2015-00-28
Tuesday, 28 July 2015 06:00 AM
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