With implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act four years ago, the federal regulatory climate has changed Wall Street, leading banks to sell off once profitable business lines, cut back short-term funding markets and break ties with entities that fall under extra regulatory scrutiny, The Wall Street Journal reported July 21.
Profits are up as Wall Street slashes costs and reduces funds set aside to cover future losses, but their traditional profit engine — trading — is showing signs of weakening as banks back away from some activity amid regulatory pressure.
Goldman Sachs Group, for example, cut $56 billion (6 percent) from its balance sheet in the second quarter, the deepest quarter-over-quarter reduction since the financial crisis. And Morgan Stanley has trimmed assets by a third since 2008 while also downsizing its fixed-income trading and turning its focus to wealth management. Citigroup has unloaded almost $700 billion in noncore assets and has said it will sell its consumer businesses in Spain and Greece, the Journal reported.
Bank of America has dumped more than $70 billion worth of business and assets since 2010, and has unloaded 746 legal entities since the close of 2009. Those have included private-equity investments, some credit card business and a significant portion of its mortgage business.
Bank of America spokesman James Mahoney told the Journal, “Dodd-Frank certainly catalyzed substantial amounts of simplification, and we're moving well beyond that through our own initiatives.”
Banks also have had to add thousands of new employees to oversee and manage compliance with new regulations. By the close of 2014, JPMorgan Chase likely will have added 13,000 employees whose jobs cover regulatory, compliance and control efforts. CEO Jamie Dimon believes that by year’s end, the firm will have 30,000 staffers focused solely on those efforts, a 33 percent increase since 2011.
Comptroller of the Currency Thomas Curry told the Journal that he thinks the regulations are working to reduce risk, “Really, we're in a substantially different place and a much improved place.”
Nevertheless, banks are taking ever increasing risks as they try to overcome still sluggish economic growth, low interest rates and steep regulatory costs.
The Journal reported that in 2013, U.S. leveraged syndicated lending amounted to $1.244 trillion compared to $893 million in 2012. It also surpassed 2007’s peak of $1.191 trillion, according to data from finance software company Dealogic.
However, lawmakers on both sides of the aisle remain unconvinced that the government is doing enough to prevent another crisis of “too big to fail” companies. “It's definitely changed but not enough,” Sen. Elizabeth Warren, D-Mass., told the Journal. She added that big banks have lobbied to weaken Dodd-Frank rules and once again position themselves as a risk to taxpayers.
Wall Street lenders and analysts disagree with Warren’s assessment, telling the Journal that increased regulation could prevent banks from lending to the degree necessary to fuel economic growth.
“It's almost hypocritical to complain about banks not facilitating more growth while at the same time saying banks have to further de-risk,” Mike Mayo, analyst at the brokerage firm CLSA, told the Journal. “One way for banks to have no losses is to make no loans.”