Banks’ Brimming Optimism Keeping Regulators Up at Night

November 15, 2013 By In Uncategorized No Comment

Dodd-Frank and other Wall Street regulations born from the financial crisis were formed with one overarching goal: no more taxpayer bailouts. If you ask Morgan Stanley Chief Executive Officer James Gorman, regulators and big banks have done one heck of a job ensuring that reality.

With the fifth anniversary of the financial crisis around the corner, Gorman was asked about the chances of a repeat need for taxpayer bailouts. “The probability of it happening again in our lifetime is as close to zero as I could imagine,” Gorman told PBS. “The way these firms are managed, the amount of capital that they have, the amount of liquidity that they have, the changes in their business mix — it’s dramatic.”

Yes, banks are better capitalized today than five years ago, but it’s this “all is well” belief that’s become part of the problem, according to regulators.  

In its recent examination of the nation’s 18 largest banks, the Federal Reserve identified several problems, all of which fit under one umbrella: banks remain ignorant of their own weaknesses. They assess their risks too broadly, often failing to recognize their own “idiosyncratic vulnerabilities,” according to the Fed.

Some banks, when dreaming up the possibility of another crash, assume advantages over others that they believe would suffer more in an adverse economic scenario.  Several even assumed market share gains in hypothetical stress tests that were submitted to the Fed.

The fight between banks and regulators has been rather one-sided since the recession. Executives simply lost too much of their leverage and were forced to get on the same page as regulators. As banks continue to get healthier, particularly with stock prices rising, executives will have more right to dig in. Expect the fight over capital requirements to be a two-sided affair.


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