Friday, November 07, 2014

The tension over banking regulation

Whether the public wants to believe it or not, today banks, including the big banks, are highly sensitive to abiding by government regulation, that is if they can figure out the rules.  The big banks in particular have been hit with huge penalties over the last four years, and these fines continue almost unabated more than six years after the Great Recession, that has long since passed, began.

At this point the Justice Department, state AG's, and the SEC piggyback together to extract these huge penalties that have little connection to real damages.  They often seem to be based simply on comparisons.  If these legal entities get a settlement from one bank on a certain activity, that and often plus more becomes the proxy for all other banks.  Since confidence is such a crucial part of banking and these regulators seem to have the ability to ruin businesses if they choose to do so, banks fall over each other to capitulate as quickly as possible in most cases.  See BofA's latest dilemma.

The so-called "Libor rigging" and "currency market manipulation", two separate regulatory vendettas, are called scandals before anyone fully understands what the facts are, and more importantly what the actual damage of any possible wrongdoing is.  The damage is always assumed to be massive and the execution of these schemes described as "conspiracies" with the intent of defrauding the public.  It is not that simple, not even close.  A few bad actors do not damn an entire industry and entire parts of the capital markets.  That fact does not slow down the regulators and politicians.

So how did this rant begin?  We have been trying to get the required medallion signatures to gather assets for two estates.  The first estate focused on is being executed in this jurisdiction. Two our local banks, retail branches of really big banks, have declined to give them due to associated risk and new rules.  We have not yet talked to our third banker.  Our primary bank said that they would execute the medallion signatures only if we opened the estate account there.  That was our intent since they are our major bank and we have an embarrassing amount of assets there to support our liquidity in this zero interest rate environment, so they should definitely meet the new "know your customer" guidelines.

Here is the silly conundrum.  They say that we need to have money to deposit to open an account.  Since this will be an estate account, the money needs to be related to the estate, sort of makes sense.  If we cannot get the medallion signatures to get the money released from brokerage firms and banks, we have no related money to deposit.  And, as you the reader can see, if we can't open an account we can't get the medallion signatures.  Makes sense, right.  NO. 

This will be worked out.  The rules cannot be this stupid.  The retail bankers are either as frustrated as we are or they are just adamantly stubborn, as a cabdriver in New Orleans once said to me, "stubborn equals stupid".  In general this is all apparently due to new implementation of parts of the Dodd Frank law or they are part of the Patriot Act rules, or BOTH.

Which comes first, the chicken or the egg?  Some bankers have no idea, but they know that they will take no risk when it comes to regulatory dictates, no way.  They like to have their jobs.  It has to be certain that this will be worked out at a more senior level at our main bank, but what happens when we need other medallion signatures for the second estate that is being executed in upstate New York.  Who knows?

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