In their first presentations to analysts after the financial reform bill passed, some bank executives treated the landmark legislation like any other facet of business, sandwiching relevant cost estimates between the usual slides on capital ratios and credit losses.
Other executives, though, acknowledged the Dodd-Frank Act as they might a one-time item, offering a few minutes' discussion during conference calls reviewing the second quarter.
Either way, industry leaders — including some who had voiced sharply worded opinions while the legislation was being debated — had a generally muted reaction to the whole thing once it was over, showing little by way of emotion or outrage.
Was this the true denouement of a drawn-out, political story line, or the calm before a regulatory rulemaking firestorm?
It most likely was a bit of both.
On one hand, banks have had time to come to grips with the constraints imposed by the Credit Card Accountability, Responsibility and Disclosure Act, which was signed into law more than a year ago.
And though new Regulation E overdraft rules did not take effect until after the close of the second quarter, banks have had more than six months to prepare for the measures — and in some cases made voluntary changes in their overdraft policies that already have reduced fee income by meaningful amounts.
On the other hand, whole sections of the Dodd-Frank law defy prediction of the bottom-line effect.
Who can say how much impact the Consumer Financial Protection Bureau will have? Who can know how easy it will be for banks to replace trust-preferred securities that the Collins amendment disqualified from inclusion in Tier 1 capital, or where the Federal Reserve will draw the line when it applies "reasonable and proportional" standards to the interchange fees charged by debit card networks?
With so much at stake, banks are under pressure to approach the new regulatory order much as hockey great Wayne Gretzky was said to approach the game: by skating not to where the puck had been but to where it was going to be.
"What we're advising our clients to do is to look at the necessary changes you have to make, whether it's funeral planning or anything else, and at the same time look at how you take out costs and make profits more efficiently," said Chris Thompson, who heads the financial services industry risk-management practice at the consulting firm Accenture. "Too many times, banks have moved quickly to comply with new regulations and gone back later to figure out" how to offset the impact.
This time, he said, with banks needing to comply with hundreds of rules contained in the legislation or farmed out to federal agencies to work out the details — as opposed to the dozen or so rules that emerged from the Sarbanes-Oxley Act of 2002 — it will be much harder to bear the cost of compliance without taking simultaneous steps to cushion the blow.
Given all the lingering uncertainties, bank executives on their second-quarter earnings calls sounded as frank as one could have expected in assessing the reforms' effects.
"We're trying to make sure that we get the rules really set and then we can react to it," Bank of America Corp. Chief Executive Officer Brian Moynihan told analysts on a July 16 conference call. But the company offered forecasts where it could, saying it expects to lose $1 billion of revenue this year to the CARD Act and another $1 billion to Regulation E.
Meanwhile, Bank of America expects revenue from debit interchange to fall by $1.8 billion to $2.3 billion on an annualized basis, starting in the third quarter of 2011, as a result of the Durbin amendment that limited the debit interchange fees charged by Visa Inc. and MasterCard Inc. and funneled to card-issuing banks. Other effects stemming from the law will show up as early as this quarter, in the form of a $7 billion to $10 billion impairment of the goodwill built up in Bank of America's card business.
Like most of its peers, Bank of America, which has more domestic assets than any other U.S. bank and presumably the most at stake as financial reforms are enforced, did not include the effects of any potential mitigation efforts in its forecasts.
The prospect of finding alternative fee sources or of making cost cuts in other areas to offset new regulatory burdens makes it all the more difficult to construct even a ballpark estimate of how much bottom lines will be reshaped by the Dodd-Frank law and the other reforms — though Barclays Capital issued a report in late June predicting an aggregate $18 billion hit to earnings in 2013 for 26 of the largest U.S. banks on its coverage list.
Some banks already have revised their early forecasts of certain reform costs. SunTrust Banks Inc. last week said that fee income shrinkage tied to Regulation E would be less severe than initially feared because customers have opted in to overdraft protection in larger-than-expected numbers. JPMorgan Chase & Co., meanwhile, raised its forecast of the impact of the overdraft changes on after-tax net income, to $700 million for an unspecified period, from the previously estimated $500 million.
Forecasting has been even more challenging as it pertains to the Durbin amendment, which leaves broad room for interpretation by the Fed.
Kevin Kabat, the CEO of Fifth Third Bancorp, offered analysts a useful nugget, saying every 10-basis-point reduction in interchange fees would cost the Cincinnati company about $15 million annually. But he, like other CEOs, declined to guess how big the reduction would be.
"It really is just hard to tell," Kelly King, the CEO of BB&T Corp., told analysts last week. "I mean, first of all, the Fed has about a year to figure out what the rules will be. There's so much ambiguity in the language of the law. … [It] potentially could be material."
Aside from acknowledging the phaseout of about $3.2 billion of trust-preferred securities from its Tier 1 capital calculations to comply with the Collins amendment, BB&T was light on numbers in assessing the impact of regulatory reform.
The company said that the CARD Act, the Volcker Rule and provisions regarding preemption and mortgage reform would have "minimal" impact on the bottom line and that the effects of potential actions by the Consumer Financial Protection Bureau, Financial Stability Oversight Council and Federal Insurance Office are "uncertain."
As for Regulation E and new deposit insurance assessments, just like the Durbin amendment, these may have a "potentially meaningful" effect, BB&T said.
But if that is the case, the Winston-Salem, N.C., company plans to have offsetting measures at the ready.
King said that BB&T is "in the midst of deep analysis" with regard to product changes that could include the dropping of card rewards programs or imposition of a fee for the issuance of debit cards to customers.
"You're just not going to see us take all of this negative [impact] without making material changes," he said.
Meanwhile, the industry appears primed to try to limit the extent to which bottom-line damage is inflicted in the first place. The New York Times reported this week that nearly 150 former employees of federal finance agencies have registered as lobbyists since last year and that dozens of former government lawyers are peddling their readings of the new regulations to corporate clients — all as regulators begin crafting the details of hundreds of rules Congress has tasked them with writing.
It was not mentioned on the earnings calls of the large U.S. banking companies, not by executives or analysts, but every ounce of prevention presumably translates into profits saved — even if it is hard right now to put a dollar amount on the savings.