Merryn's Blog

Big banks will be big losers from the new US finance bill

The US's landmark financial reform bill is a mixed bag, with some winners and some losers. But the biggest losers by far will be the major banks. Here's why.

Bank regulation: thrilling it certainly ain't.

But it's worth taking a quick glance at what's just happened overnight across the Atlantic, because US Senators have just passed a landmark financial reform bill.

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This is the biggest rule change for the sector since the 1930s. The aim is to stop a repeat of the 2008 bank crisis, where lenders that had become "too big to fail" had to be bailed out, and which almost brought the global financial system to its knees.

The new bill is certainly no quick fix it grinds on for 2,315 pages, which include fully 533 new regulations. Clearly, we'll all be unpicking this for some time to come. But in the meantime, here are what look to be the main winners and losers, as City AM puts it this morning.

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Winners

US consumers should be better protected from risky financial products (but don't hold your breath on this score).

The Federal Reserve will gain more powers, and becomes the home of the new Consumer Financial Protection Bureau (CFPB). Whether giving the Fed yet more power given that loose monetary policy and weak mortgage market oversight caused this problem in the first place is a good thing for everyone else, is another matter.

Shareholders will now have more say on bankers' executive pay.

Lawyers (when do they ever lose?) will get loads more business writing the detailed rules and explaining them clients.

Losers

Credit rating agencies could be sued even more bunce for the lawyers if they "recklessly" fail to review key information when setting ratings. And reliance on credit ratings will be cut, as these will now be removed from regulators' rules.

Yet the largest losers will be the major banks. They'll be stopped from proprietary trading dealing on their own account and will only be able to make small bets on the likes of hedge funds. They'll have to sell off some of their most profitable derivatives businesses or risk losing access to the Fed's emergency funds; they'll face tougher capital rules; and their mortgage and credit card businesses will now come under the beady eye of the CFPB.

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We're already very cagey about the big US banks. This new Bill makes us even more wary.

As for the overall impact, it's very mixed bag, as new regulation often is. There are "some good bits but lots of bad stuff", says Allister Heath at City AM. And "it will take months if not years before we fully understand what the legislation means for Wall Street, the economy and, of course, London". Judging by regulatory reforms of the past, the chances are that the seeds of the next financial crisis have just been sewn we just don't know it yet.

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