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Banks Face Unknown 'Regulatory Risk'

How much will regulatory reform cost the banks? The joint US House/Senate conference on regulatory reform is in the last two weeks of its reconciliation process, and it is looking like tougher versions of many parts of the bill may pass.

Citigroup, in a note to clients, estimates that if the main parts of the bill become law (Volcker Rule banning prop trading, tighter restrictions on prop trading, new derivative rules, etc.) there would be an average 11 percent hit to bank earnings.

However, the large capital market banks — Bank of America , JPMorgan , Goldman Sachs and Morgan Stanley — would be more impacted.

Even if the bill passes, regulatory uncertainty is a major wild card.

Here's two examples, of many:

1) under one form of the bill, regulators can determine "reasonable and proportional" fees that can be charged for debit cards. Regulators have nine months to determine what the rates will be, but how do you define the terms? Regulators will decide much of the language.

2) what is prop trading? The stronger form of the Volcker Rule would prohibit proprietary trading, but how do you define that term? When is client facilitation prop trading? Regulators would decide.

This "regulatory risk" means that passage of a bill will not clear up all the uncertainty around regulatory reform.

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