Friday, the US House of Representatives passed their version of the financial regulatory reform package. By a vote of 223 to 202, the House followed much of what the White House wanted for the bill. The bill is broad in its scope from OTC derivative regulation to the creation of a new Consumer Financial Protection Agency (CFPA) to a new system for winding down failing financial institutions. The Senate is expected to move forward on their version next year.
Just weeks away from entering an election year, the Democratic leadership is pleased with delivering on a reform bill. At a news conference today on the bill, US Speaker of the House Nancy Pelosi said, "This is really an important day for our country. Because of the leadership of the people you see gathered here, we are sending a clear message to Wall Street: the party is over. Never again will reckless behavior on the part of the few threaten fiscal stability of our people."
Last night on "60 minutes", President Obama said that he did not run for office to be "helping out a bunch of fat cat bankers on Wall Street ... What's really frustrating me right now is that you've got these same banks who benefited from taxpayer assistance who are fighting tooth and nail with their lobbyists up on Capitol Hill, fighting against financial regulatory control," he said.
However, Congress should think long and hard about passing a bill that puts US financial institutions in a competitive disadvantage to other countries. How ironic is it that President Obama is meeting top banks today to get their support for a bill that would undermine their business. And undermine what the President truly wants them to do: lend more to small and medium sized firms.
Let me illustrate by what is happening in the Europe. The UK government on December 9th announced a one-time 50% tax on bonuses more than 25,000 pounds and France said that they would follow with a tax on bonuses exceeding 27,000 Euros. This far exceeds what the Financial Stability Board guidelines. They advocated for banks to discourage bonus guarantees longer than one year, encourage companies to defer bonuses for senior executives and other key employees and enable pay to be clawed back if losses occur at a later date.
This is not gone unnoticed by the rest of the industry. Deutsche Bank AG Chief Executive Officer Josef Ackermann said Germany has a “comparative advantage” over other financial hubs because it doesn’t plan to tax bonuses like Britain and France according to Bloomberg. “To strengthen the financial hub of Germany I think is a very wise move,” Ackermann said in an interview in Berlin late yesterday."
In a global market, the more regulations/restrictions one government places on their banking industry, the less competitive that industry becomes. Unlike many industries, the financial sector is technology and people intensive. This allows the "assets" of a firm to be extremely flexible where they work. This means that if one bank can't pay industry levels of compensation, those assets can move quickly to another firm or another country. This is the paradox of reforming finance.
While there is clearly need to change the way the United States regulates and manages its financial industry, the House bill way forward may be a major step backward. If the reform forces domestic banks in the US into an uncompetitive position, then they will be either be forced to move out of the market/country or they will lose their people...or both.
The one thing they will not likely do is increase lending to where the President wants.
Andrew B. Busch is Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and