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Bank execs on reform: What, me worry?

By Howard Schneider

To hear the politicians tell it, new financial regulations - whether the Dodd-Frank bill in the U.S. or the banking rules crafted in Basel, Switzerland - represent historic change that will deeply alter how financial companies are run.

But an upcoming study from IBM suggests the whole thing is landing with a bit of a shoulder shrug among industry executives. Researchers at an IBM think tank, the Institute of Business Value, interviewed 54 top financial industry executives around the world and a full half said the new regulations would prompt little or no change in how the industry functions, while another 7 percent saw only "moderate" change in the offing. The remaining 43 percent agreed there would be "significant change."

Perhaps more telling: a whopping 87 percent feel the new regulations will do little to hurt industry returns, with 50 percent saying the slew of new rules will hit the bottom line by only a "small amount," 31 percent expecting returns to stay the same, and 6 percent expecting to earn more under the new regime. There is, they said, no obvious incentive to do things much differently.

The sample, of course, is small, but as a snapshot of thinking in the executive suite it is a fascinating contrast to the public debate. The regulators and government officials responsible for writing the new regulations feel they have at least partly immunized the financial system from another crisis through stricter oversight, tougher capital rules and other measures. The financial industry, meanwhile, claimed as those regulations were being written that they threatened to shut down lending and slow the economy.

The truth lies somewhere else, said Suzanne Duncan, financial markets industry leader at the IBM institute and the chief researcher. Preliminary interviews among the regulators and government officials suggest they felt constrained by politics from doing everything they felt necessary (the Basel discussions, for example, ultimately set aside some of the broader ideas about global regulation of the industry because of disagreements between European nations and the U.S.). Meanwhile, among executives, "the conversation at these companies is that we can actually make a lot of money on this - it is happening, lets figure out how we can monetize it," Duncan said.

Stronger companies are discussing whether they could set up advisory arms to help weaker banks deal with new capital standards, she said, while few see any major change to the basic business model at banks, hedge funds and other parts of the financial industry.

"Before the reforms came out there was a fear it would be horrendous for them," Duncan said. "Once it went through there was less of a concern than we anticipated."

The full study is to be released next year, once interviews with government officials and regulators are completed.

By Howard Schneider  | September 24, 2010; 9:00 AM ET
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