General Increase in Government Intervention

1. General Increase in Government Intervention • Safety Nets • Bail outs • Deposit insurance • Discount windows Decrease industry stability

2. General Increase in Government Intervention • Regulations • Heightened Supervisory Power • Requires market • discipline • Improves corporate • governance • Improves bank • function

3. General Increase in Government Intervention • Increase market discipline • Increase cost efficiency • Increase profit efficiency • Reduce asymmetric information • Reduce transaction costs • Decrease stability • Economies of scale in • compliance costs • Discourage entry of new • firms • Consolidation into larger • banks • Reduction of competition

4. General Increase in Government Intervention Increased Regulation requires increased information disclosures Information disclosures are costly Compliance is expensive

5. Regulatory Consolidation: FIRA

6. FIRA: Efficient Information Sharing NCUA Fed FDIC OCC OTS Financial Intermediaries NCUA Fed FDIC OCC OTS FIRA Financial Intermediaries

7. Regulatory Consolidation: CFPA

8. CFPA: Potential Benefits and Problems • Potential Benefits: • Higher standard of accountability • New customers • Innovation of standardized financial instruments • Potential Problems: • Hinder innovation in other areas • Profit inefficiency • Lower growth rates

9. Regulatory Additions: SEC & CFTC • CFTC

10. Inadequate Funding • SEC Needs: • Increased assessments on institutions • Exemption from appropriations process • > $1.026B 2010 • CFTC Needs: • >$14.6M • 38 new jobs • Larger Staff

11. Regulation of OTC Derivatives by SEC & CFTC Historically: • Speculative trading • allowed only on • exchanges • CDS’sare enforceable • only if one party • has an insurable interest, or • has a real pre- • existing risk • Current Proposal: • Only standardized derivatives enforceable when traded on exchanges • Customized derivatives enforceable only when traded over-the-counter

12. Increased Capital Requirements • U.S. core capital requirements • for banks farexceed • international averages • Largest banks in U.S. ranked in top • 20 of The Banker’s Top 1000 listing* • May move financial relationships • abroad • Trade-off between cost efficiency and • profit efficiency *(ranking firms by strength measured in Tier 1 capital using data from 2009)

13. Restrictions On Banking Activities • Obama’s Recommendations: • Commercial banks retain • investment banking operations • BUT: • Banks banned from • investing in hedge funds • or private equity • Limit bank growth: • Limit market share of • liabilities a bank is allowed • to take on • Ban proprietary trading • “Loopholes”: • Murky definition of • proprietary trading • Treasury Department may • allow banks to drop their • status as bank holding • companies and avoid such • regulations

14. Trade-offs

15. Considerations Costs will ultimately be borne by clients “Risk management is not about the elimination of risk; it is about the management of risk.” –Thomas F. Siems Macro-decisions

16. Macro-Decisions Stability v. Growth opportunity Cost efficiency v. Profit efficiency Ability to compete abroad Aggregate effect of changes Short-term v. Long-term goals Acceptable Risk v. Unacceptable Risk