Last week—six years after the enactment of the Dodd-Frank Wall Street Reform Act of 2010*—31 of the largest U.S. banks received passing grades on the Federal Reserve’s “stress test “ requirements. The purpose of this test was to ensure that the largest banking institutions were able to stand on their own in case of another financial crisis without any added support of the federal government.
Does this mean that the Fed is done telling the banks just how “high to jump”?
The answer is “no.” In fact, it should be considered the “new normal” for banks.
I expect the following trends to continue for banks:
The Fed will continue raising the ratio of capital to liquidity requirements on the largest banks as a form of control against economic risks.
Banks will continue to be sensitive to the level of deposits they gather and the deposits rates they offer. Operating cash will be pursued while non-operating and reserve deposits will be shunned.
Banks will focus more on lending and transactional services than on deposit products.
The level of risk and compliance sensitivity will be paramount in managing client relationships on all levels.
Client selection will be based on revenue and cross-sale potential. In addtion, banks will reverse from the call center approach to in-person bankers in order to deliver more complex solutions and improved technology.
Bank charges for services will transition from “soft costs” to “hard charges” for greater transparency. The net effect will actually benefit both sides of the banking relationship.
Banks will partner or purchase third-party financial tech companies to streamline technology advancement and offer an enhanced client experience.
The banking industry is not an easy business to be in these days. The pressures banks feel are a result of more intense and more complex government regulations.
Bankers are an important part of day-to-day business activity and they deserve our support and understanding. They are the backbone of the U.S. economy.
If we all had to deal with the ever-changing rules and regulations from Basel III, the Dodd-Frank Wall Street Reform Act, the Volker Rule, the Durbin Amendment, etc., we would be ready to take a permanent vacation. However, our banks have done an outstanding job in an industry that we all need and use on a 24/7 basis.
*Note: In July 2010, when Dodd-Frank was signed into law, it was 2,300 pages in size—with additional regulations to be established going forward. Six years later it is over 20,000 pages and still counting!