Questionable reform

I say what?

An interesting, but flawed, bit on the effects of reform legislation on banks.  I don’t think the author extended his conclusions very well.  If the legislation is “forcing” the banks to concentrate growing revenues  more on the small business and customer facing portions and less from the trading floor, the result will be an increase in fees and cost of credit to the average consumer.  For those of you who do, or have done, business with Wells Fargo, you are probably already intimately familiar with how that works.  There is a literal fee for just about everything and that has a very beneficial impact on their bottom line.

Additionally, the author only loosely discusses capital/leverage.  Essentially, the new law is requiring that banks have more capital on hand to cover the risk associated with their lending.  A common example is that for every dollar you would deposit into a bank, the bank would lend 7 dollars out in loans, using your original dollar as a hedge against 100% risk.  Now banks have to keep more capital on hand than before, say $3 for every $7 they lend.*  This will require them to take in more money in order to be able to lend more money.  Two ways of doing this are to reduce their expenses and increase their fees.  I can guarantee you that they won’t be paying their executives less…

I also suspect that the 41% to 21% trading amount largely reflects the disappearance of sub prime mortgage “investments” and similar high risk vehicles that helped perpetuate the bank crisis in the first place.  The market has performed very well in the last several years and certainly isn’t something a financial institution should shy away from purely because they can’t leverage as much capital as before.

*Purely hypothetical amount

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About Dan Granot

I chose the Shorter Whitman because of his work, "Song of Myself" and because of my self-deprecating sense of humor. I am under no illusion that I can write successful essays or poetry, but I have been known to write them anyway.

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