Financial Risk Managers Ready for Uncertainty of Political Landscape
By KATIE KUEHNER-HEBERT, a freelance writer based in San Diego with more than two decades of journalism experience and expertise in financial writing
The massive Republican sweep in the midterm elections will likely spell at least some tweaks to the new Dodd-Frank Wall Street Reform and Consumer Protection Act, but risk managers at financial institutions should continue to prepare for the massive new requirements that the still Democrat-controlled Senate won't give up. So said several industry experts, who speculated on the likely changes to the financial reform law, once the new Congress convenes in January.
Signed into law in July in response to the financial crisis, Dodd-Frank has been regarded as the most sweeping change to financial regulation in the United States since the Great Depression. It created 243 new mandated requirements in almost every aspect of the financial services industry that regulators must now promulgate.
Whatever changes to the new law Republicans introduce in the new House will be met with resistance in the Democrat-controlled Senate and could face a veto by Obama, sources said. As such, any changes would likely have to be bipartisan.
Peter Went, vice president at the Global Association of Risk Professionals, said there could be some bipartisan tweaking to the Volcker Rule on proprietary trading, which involves derivatives trading using central counterparty clearing houses and quantitative retention rules for securities activities. To what extent is still anybody's guess, though risk managers at banks would still need to be prepared for moderate changes.
"It would put a bigger onus on risk managers to work with regulators to contain propriety risk trading," Went said.
If regulators allow banks to trade derivatives under prior models, it would also put more demand on risk managers, Went said.
Risk managers "will have to work harder on understanding those risks that the banks will have to retain," said Went, if the quantitative retention rules for securities activities are eased.
Bill Githens, president and chief executive of the Risk Management Association, said that his Philadelphia-based, financial services-geared group doesn't expect any real changes in the law, and that the industry is just waiting for the regulators to fill in the details. For risk managers at banks, that spells continued uncertainty.
One thing is certain though: All expect final implementation of the new rules to be costly and burdensome to financial institutions, said Githens.
"Risk managers have accepted that change is coming and are focusing on managing that change effectively," Githen said. "They're thinking about how the new rules may impact business models and are adapting the business framework as necessary."
One thing that Republicans could do is give regulators more time to write all of the new regulations required under the Dodd-Frank law, according to Richard Epstein, a New York University law professor and a Manhattan Institute visiting scholar.
Moreover, the new Congress might opt to let those regulators that are in charge of making sure banks are safe and sound--the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and the Federal Reserve--be the agencies to actually promulgate the new consumer regulations that fall under the purview of the Bureau of Consumer Financial Protection, said Steve Verdier, executive vice president of congressional relations at the Independent Community Bankers of America.
That way, "the new agency doesn't impose restrictions on banking activities that undermine or are not consistent with the sound operations of banks," Verdier said.
November 5, 2010
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