The banking overhaul bill has passed! To quote the Kiplinger Letter, “The regulatory revamping cuts a wide swath, giving broad power to Uncle Sam to protect consumers and discourage banks from engaging in risky behavior.” The main goal of the law is to prevent a crisis like the one experienced in 2008. Let’s hope the law will act as a warning system when greed and fear creep into decisions being made by financial institutions. One of the key components is that the Fed now has the authority to seize big financial firms and banks before panic sets in. The largest of banks will increase their reserves so that they are less likely to crash in economic down turns. Harry Reid was quoted saying, “Now no bank is too big to fail.” However, there will always be financial giants that would cause disaster in world markets if they failed. The new higher capital requirements of the big banks will make lending standards more demanding, which will have a slight drag on the recovering economy. GDP is expected to be 3-3.5% in 2010. The big banks will also be required to hold 5% of the loans they underwrite in their own portfolio. Smaller banks have less capital requirements then big banks, but they could be affected by the reduction in certain fees that can be charged to consumers. The bill does permanently increase the FDIC insurance to $250,000 per account. The SEC also gains authority to force corporations to let shareholders nominate candidates for boards. The bill was not intended to provide investor protection. However, increased transparency and disclosure by financial firms that could help prevent a meltdown will be good news to investors.
Gregory D. James, CFP®