Banks need to cut or revamp product lines to comply with Dodd-Frank
The pressure is on for banks and financial institutions to reexamine their portfolio risks, capital requirements and product offerings to comply with Dodd-Frank Wall Street reforms, analysts with SolomonEdwardsGroup said this week.
Sweeping reforms ushered in under the act may even require financial institutions to exit certain business lines or adjust those lines to meet the new guidelines, the report concluded.
"This legislation takes bold action to prevent another financial crisis," said Candace Caley, SolomonEdwardsGroup’s National Banking Practice leader. "Banks must begin to assess the impact of the act and develop strategies to adapt in this altered world."
Developing a timely compliance plan to meet the demands of Dodd-Frank is essential for financial institutions that will eventually be under the scope of the Financial Stability Oversight Council, a regulatory body created by Dodd-Frank.
"The scope and manner in which the FSOC will operate will be an evolutionary process as it puts in place its own internal rules, procedures and systemic risk regulations," SolomonEdwards analysts said.
Dodd-Frank, the Wall Street reform package signed by President Obama in the summer of 2010, also mandates that trust preferred securities will be extinguished from Tier 1 capital with $15 billion or more in assets. When this rule takes effect in five years, medium-sized bank holding companies with less than $15 billion in assets and small banks with less than $500 million will not be required to make the same capital deductions for trust preferred securities issued prior to May 19, 2010.
But, SolomonEdwards said, "larger banks with $15 billion in assets and above that have a large percentage of their Tier 1 capital in trust preferred securities will need to develop a plan to replace these securities with common stock, and/or reposition their balance sheets regarding asset risk for the change in allowable Tier 1 capital by Jan. 1, 2016. The process for the issuance of common stock can require considerable planning, time and resources before such an offering is marketed to potential investors."
The act also is changing the calculation used to determine how banks pay the Federal Deposit Insurance Corp.
"The intent of this new assessment base calculation results in larger financial institutions with more 'non-deposit liabilities' on their balance sheet paying a greater percentage of the aggregate insurance assessment while smaller banks will likely pay less," the SolomanEdwards report said. "This proposed 'asset less equity formula' basically results in a bank’s insurance assessment being calculated on total liabilities."
Under this new calculation, larger banks will bear more of the burden for the overall cost of federal deposit insurance, leading to some savings among smaller banks and financial institutions, according to analysts.
"In the short term, there is a clear and positive impact for community banks and smaller financial institutions due to the savings associated with reduced FDIC insurance fees," the report found. "But in the longer term, community bank margins may be negatively impacted by the increased cost of funds due to competitive pricing."
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