In 88 pages, the Obama Administration last week unveiled its plans to revamp financial regulation--to remold the U.S. financial system, so to speak. The plan tweaks the system; it doesn't rebuild it anew. It targets the obvious problems, but doesn't present a radical, different structure. So what does all this mean to finance professionals in the short- and long-term?
If and when new regulation is executed or enacted, finance professionals may not see revolutionary changes in the way financial business is conducted. They could see, nonetheless, subtle changes in how financial business is conducted, how transactions to get done, what activities will be limited, or how long it takes for new products to be distributed to the public.
Changes might occur in a variety of ways:
1. The Federal Reserve--with its more visible role and greater powers--will continue to seek to recruit top talent--not just in the short-term, but for long careers. In the current environment, it is taking advantage of available, displaced talent and doing an admirable job to convince that talent how rewarding a longer-term career with it can be. Its recruiting strategies will be for the long haul.
The same applies to the FDIC, which has been at the main table of crisis-related issues and making its views known about top management at banks and whose powers, too, have been strengthened in the proposals.
2. Because regulators in this environment have been able to attract talent, there will be more who will have career paths that transition them back and forth between public and private sectors--from, say, the OCC, SEC or Fed to Wall Street and back. And they will do so with little stigma and lots of significant know-how and contacts.
3. Financial institutions will continue to beef up in areas of compliance, legal, and systems. With new requirements, as the Fed, OCC and FDIC (as well as the SEC and CFTC) watch as closely as ever, institutions will need to ensure they are adequately staffed.
Compliance doesn't necessarily mean hiring more lawyers and accountants, but also requires more systems and analytics to value and account for financial assets and ensure sufficient capital is set aside for the same--no easy task for institutions with tens of billions in trading assets, loans, mortgages, derivatives, and other securities.
More than ever before, institutions will seek to hire experienced people who had senior roles at regulatory agencies to help them interpret the rules and institute proper procedures.
4. Financial innovation won't disappear, but will slow down. New products, whether for institutions or consumers, will be reviewed and assessed more carefully than ever--similar to time-consuming FDA scrutiny of new drugs. Some financial products may never make out of the laboratory. They will be analyzed extensively for profitability, capital support, regulatory approval, public blessing (possibly), and potential to cause devastating losses.
In the past, competitive pressures forced institutions to get products out promptly, especially because in finance, profit margins are highest in a product's early stage. Now no institution wants to be the one that spawns the next generation of CDO-like products that could cause havoc in the global system.
5. "Clearinghouses" will become more important and more visible. The proposals encourage the formation of third-party institutions to act as settlement or processing agents in derivatives transations. The role of processing and settlement of securities and derivatives transactions--especially for new products, always unsung and unglamorous, won't be taken for granted.
6. Any institution that interfaces with consumers (whether selling products or orginating mortgages or doing basic transactions) will need to staff up to manage the requirements from the new Consumer Financial Protection Agency.
Many large institutions already have basic infrastructure in place to handle new requirements, so they can't complain about how onerous they will be. There will be new staff. And there will be incremental costs to comply (with possibly negligible impact on shareholders). However, the new staff and new costs will be nowhere near the losses they all incurred because of mishaps in the risk management or regulatory oversight over the past few years.