Will FinReg Make a Difference?

Banks are expected to find ways to offset the impact of the new financial regulations on their earnings, though they face a potentially complex process of adapting to the new requirements, analysts said on Friday.

The share prices of some of the biggest United States banks, including Citigroup, JPMorgan Chase and Bank of America, were higher in afternoon trading, hours after a House-Senate conference committee completed work on a bill that would toughen financial regulations.

Analysts pored over the specifics of the deal as they emerged on Friday and expressed a wide array of views about the impact it would have. Some saw the bill as more of a political statement than a practical measure that could prevent another financial meltdown. Others said banks’ costs would increase, but banks would pass the increased costs along to consumers.

That just about says it all.  The new financial regulation will make little difference to the operation of financial markets, for three reasons:

1. Financial institutions will innovate around the new regulations, as they have done for decades in response to past regulations.

2. Large financial institutions already regard their liabilities as having implicit insurance from the Fed/Treasury, whether or not they have explicit insurance via FDIC.  Nothing in these regulations will overcome that moral hazard.

3. The new regulation does nothing to clean up – i.e., eliminate – Fannie and Freddie.

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