What To Expect From Financial Reform For Banks And ETFs (XLF, C, BAC)
Here are the highlights of the bill courtesy of Reuters:
SWAPS PUSH-OUT: Wall Street firms that dominate the $615-trillion over-the-counter derivatives market would have to spin off dealing operations in some swaps, but could keep many swaps in-house, including derivatives to hedge their own risk.
Much OTC derivatives trading would be redirected through more accountable channels such as exchanges and clearinghouses. Many OTC contracts end-users could carry on as before.
VOLCKER RULE: A new rule would bar proprietary trading by banks for their own accounts unrelated to customers; limit the growth of the biggest banks; and curb banks’ involvement in private equity and hedge funds, except for small investments allowed by a loophole added to the rule late in debate.
Some big banks’ profits would be pinched by both the Volcker rule and the Lincoln swaps plan, with a few Wall Street giants potentially facing structural changes.
WALL ST ‘DEATH PANEL’: Aiming to prevent massive bailouts like AIG’s and disastrous bankruptcies like Lehman Brothers’, the bill calls for a new government “orderly liquidation” process for financial firms on the verge of collapse.
Authorities could seize and liquidate them, with costs covered by sales of assets and fees on other firms if needed.
CONSUMER WATCHDOG: Protection of financial consumers would be enhanced by increased government regulation.
The bill would set up a new bureau in the Federal Reserve to regulate mortgages and credit cards. The watchdog has sharp teeth, but couldn’t bite car dealers, who won an exemption.
THE BIG PICTURE: A new council of federal regulators would try to monitor the entire financial forest, not just the trees. High-risk firms could be singled out for stricter policing.
BEHIND THE HEDGE: Private equity and hedge funds would have to register with regulators and open their books to scrutiny. Not so for venture capital funds, which would be exempt.
INSURANCE COPS: The first federal monitor for state-policed insurers would be formed. It’s not federal regulation — yet.
BANK CUSHIONS: Banks would have to set aside more capital to ride out tough times, but will get several years to comply.
FED SCRUTINY: The Fed’s emergency lending during the crisis would be reviewed, but not its decisions on interest rates.
DEBIT CARDS: Fees charged on debit card transactions would be reduced — a victory for retailers over the banks.
Below are some of the likely winners and losers under the regulation bill.
CREDIT RATING AGENCIES – WIN AND LOSE
* Credit rating agencies — such as Moody’s Corp, Standard & Poor’s and Fitch Ratings — will be subject to greater liability.
* Rating agencies could be sued if they “recklessly” failed to review key information in developing a rating.
* The Securities and Exchange Commission will be given two years to find a way to mitigate conflicts of interests at the biggest rating agencies, Moody’s, S&P and Fitch, which are paid by the issuers whose debt they rate. The two years give the agencies breathing space but if the SEC does not find a solution, the regulator is required to implement a proposal by Senator Al Franken and create a board to match rating agencies with debt issuers.
* Federal regulators will be required to remove references to credit rating in their rules in an effort to reduce reliance on the credit rating agencies.
LARGE FINANCIAL FIRMS – WIN AND LOSE
* Large financial firms such as Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) will be prohibited from proprietary trading and only be allowed to make minimum investments in hedge funds and private equity funds.
* Large firms will also face tougher standards in what qualifies for capital they are required to set aside to ensure that they do not threaten the stability of the financial system.
* Banks such as Goldman (NYSE:GS) and JPMorgan Chase (NYSE:JPM) will be forced to spin off some of their profitable derivatives business or risk losing access to the Federal Reserve’s emergency funds. But banks’ biggest volume instruments such as foreign exchange and interest rate swaps will still be allowed to be traded by banks.
* The firms’ financial products such as mortgages and credit cards will be subjected to new rules from a newly created bureau designed to protect customers from risky products.
* Most derivatives will be forced on to exchanges or through clearinghouses, in an attempt to limit the effect that large, risky trades can have on the economy, another factor that could curb bank profits. Non-financial players such as manufacturers, however, would be exempt.
SMALL BANKS – WIN
* The Federal Reserve will continue supervising small banks. Small banks wanted to maintain a supervisory structure they were familiar with.
* Banking regulators will be the primary regulator to enforce rules for small banks’ financial products. The new consumer financial regulator will provide backup enforcement.
U.S. FEDERAL RESERVE – WIN
* Gains powers to supervise systemically important financial firms.
* Retains authority to supervise banks of all sizes.
* Part of a “risk council” that will have authority to monitor risk in the financial system and decide whether a large complex company needs to divest assets.
* Becomes home for the new Consumer Financial Protection Bureau. Will have power along with other regulators to appeal consumer protection bureau’s rules if deemed to undermine stability of financial system or banks’ deposits.
* The Fed escaped congressional reviews of its monetary policy but will be subject to reviews of its emergency lending and open market activities.
* Democrats and Republicans originally wanted to strip the Fed of its powers to supervise banks and confine the central bank to setting monetary policy and acting as the lender of last resort.
CONSUMERS – WIN
* New rules to protect consumers from risky financial products could only be overturned by banking regulators if banking regulators believe the rules could threaten the financial system or banks’ deposits.
* The new consumer regulator will be housed in the Federal Reserve, which has been criticized for failing to rein in the risky lending that contributed to the financial crisis.
* The consumer regulator will get funding from the Fed and would get the authority to request more funds from Congress.
* The consumer regulator will be able to write its own rules for a slew of products such as mortgages and credit cards and enforce those rules.
INVESTORS/SHAREHOLDERS – WIN AND LOSE
* Broker-dealers who provide financial advice will not immediately be required to have fiduciary duties, which would require them to act in their clients best interests. The SEC must first study the issue for six months and then would have authority to impose those duties on brokers if the regulator determines they are necessary.
* Publicly-traded companies will be required to ask their shareholders whether they want a non binding vote on executive pay annually, once every two years or once every three years. Originally, Democrats wanted to give shareholders an annual say on executive pay.
* The SEC will have the authority to give shareholders and easier and cheaper way to nominate corporate board directors.
* The Municipal Securities Rulemaking Board will be required to impose fiduciary duties on municipal bond advisers.
AUTO DEALERS – WIN
Auto dealers that do financing will be exempt from oversight by the new consumer bureau, and stay within the jurisdiction of the Federal Trade Commission.
PRIVATE POOLS OF CAPITAL – WIN
* Advisers to hedge funds and private equity funds with more than $150 million in assets will be required to register with the SEC. Venture capital funds will be exempt.
CLEARINGHOUSES – WIN
* Derivatives clearinghouses will be able to borrow in emergencies from the Federal Reserve, as long as the systemic risk council, a majority of Fed governors and the Treasury Secretary decide it is necessary.
LAW FIRMS – WIN
* Regulators like the Commodity Futures Trading Commission and Securities and Exchange Commission will have scores of rules to write in coming months to implement the legislation, meaning lots of billable hours for law firms and consultants advising clients on how to respond to proposed rules.
CFTC/SEC – WIN
* The CFTC and SEC will gain new authority to regulate the $615 trillion over-the-counter derivatives market.
* The SEC will win power to oversee the hedge fund industry.
We have put together some more details on one of the most widely held financial ETF that will deal with financial reform. We have profiled the Select Sector SPDR ETF (NYSE:XLF) below including a list of the banks within the ETF below:
Select Sector SPDR ETF (NYSE:XLF) Visit Our XLF Category: HERE
The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Financial Select Sector Index. The fund will normally invest at least 95% of its total assets in common stocks that comprise the relevant Select Sector Index. This fund has adopted a policy that requires it to provide shareholders with at least 60 days notice prior to any significant material change in its policy or its underlying index. It is nondiversified.
|1||Bank of America Corp.||(BAC)||9.77%|
|2||JPMorgan Chase & Co.||(JPM)||9.57%|
|3||Wells Fargo & Co.||(WFC)||9.09%|
|6||Goldman Sachs Group Inc.||(GS)||4.67%|
|7||American Express Co.||(AXP)||2.96%|
|11||Bank of New York Mellon Corp.||(BK)||1.99%|
|12||PNC Financial Services Group Inc.||(PNC)||1.95%|
|13||Prudential Financial Inc.||(PRU)||1.66%|
|14||Travelers Cos. Inc.||(TRV)||1.63%|
|15||Simon Property Group Inc.||(SPG)||1.55%|
|17||CME Group Inc. Cl A||(CME)||1.26%|
|19||State Street Corp.||(STT)||1.17%|
|20||Capital One Financial Corp.||(COF)||1.12%|
|23||Charles Schwab Corp.||(SCHW)||1.00%|
|24||Franklin Resources Inc.||(BEN)||0.85%|
|26||SunTrust Banks Inc.||(STI)||0.80%|
|27||T. Rowe Price Group Inc.||(TROW)||0.79%|
|30||Northern Trust Corp.||(NTRS)||0.76%|
|31||Vornado Realty Trust||(VNO)||0.75%|
|32||Marsh & McLennan Cos.||(MMC)||0.73%|
|34||Boston Properties Inc.||(BXP)||0.67%|
|35||Hartford Financial Services Group Inc.||(HIG)||0.65%|
|37||FIFTH THIRD BANCORP||(FITB)||0.65%|
|38||Ameriprise Financial Inc.||(AMP)||0.63%|
|39||Host Hotels & Resorts Inc.||(HST)||0.60%|
|43||Regions Financial Corp.||(RF)||0.53%|
|44||Principal Financial Group Inc.||(PFG)||0.52%|
|45||Avalonbay Communities Inc.||(AVB)||0.51%|
|46||Lincoln National Corp.||(LNC)||0.49%|
|51||Genworth Financial Inc. Cl A||(GNW)||0.45%|
|52||Discover Financial Services||(DFS)||0.44%|
|54||M&T Bank Corp.||(MTB)||0.41%|
|55||Hudson City Bancorp Inc.||(HCBK)||0.39%|
|56||XL Capital Ltd. Cl A||(XL)||0.37%|
|57||Plum Creek Timber Co. Inc. REIT||(PCL)||0.37%|
|58||Kimco Realty Corp.||(KIM)||0.36%|
|60||Health Care REIT Inc.||(HCN)||0.34%|
|61||People’s United Financial Inc.||(PBCT)||0.34%|
|62||Legg Mason Inc.||(LM)||0.32%|
|64||American International Group Inc.||(AIG)||0.30%|
|65||Cincinnati Financial Corp.||(CINF)||0.28%|
|67||Huntington Bancshares Inc.||(HBAN)||0.27%|
|69||Leucadia National Corp.||(LUK)||0.25%|
|70||Marshall & Ilsley Corp.||(MI)||0.25%|
|71||CB Richard Ellis Group Inc. Cl A||(CBG)||0.25%|
|74||NASDAQ OMX Group Inc.||(NDAQ)||0.18%|
|75||First Horizon National Corp.||(FHN)||0.17%|
|76||E*TRADE Financial Corp.||(ETFCD)||0.17%|
|77||Apartment Investment & Management Co.||(AIV)||0.16%|
|78||Federated Investors Inc.||(FII)||0.12%|
|79||Janus Capital Group Inc.||(JNS)||0.11%|