January 26, 2010 18:28 ET

The Hidden Consequences of "Glass-Steagall Lite": Capco Identifies 10 Key Issues of How Regulatory Reform Will Impact Banks' Operational Complexity

NEW YORK, NY--(Marketwire - January 26, 2010) - As the debate in Washington continues on banking regulatory reform, key issues are being raised that will determine the future landscape of the financial industry for decades to come. However, one crucial topic is not being talked about nearly enough: Complexity. Every nanosecond on Wall Street, millions of transactions are processed through a vast, high-tech, multi-platform labyrinth spanning technologies and geographies. Sudden, drastic structural reform will likely require every major U.S. financial institution to dramatically revamp fundamental strategy along with all of its systems and processes, from the most basic to the riskiest and most multi-faceted. The impact of such a sea change is not just monumental, it's mind-bending. Given the fragility of confidence in financial markets, rapid structural changes have the potential to further systemic disequilibrium. Any such change should only be introduced judiciously and should be accompanied by appropriate operational checks and balances to avoid negative externalities.

Capco is the global provider of consulting and managed services dedicated solely to the financial services industry. As experts on Banking, Risk & Compliance and Capital Markets, we have a unique vantage point on the operational challenges that may result from an overhaul of bank regulations. See the Capco Institute's new research: "Would the Glass-Steagall Act have prevented the recent financial meltdown?"

Capco Partner and Capital Markets Co-Leader Joe Anastasio first addressed the consequences of returning to Glass-Steagall as early as November 2008 in a speech to Monmouth University. During his 30-year career, Mr. Anastasio has served at J.P. Morgan as managing director of its North America Operations Group and at Salomon Brothers as its Managing Director of Domestic and Global Operations.

    "Uncertainty is a major concern," said Capco Partner Joe Anastasio.
    "As we have seen reflected during last week's trading sessions on Wall
    Street, uncertainty will take its toll on the workings of our market
    and the fabric that supports it.  If the financial industry, which is
    the engine of our nation's economy, cannot function because we
    hamstring our major financial services providers -- the top 10 banks
    and investment banks -- then what happens to the marketplace?"

Capco has identified 10 critical questions for policymakers, business leaders and thought leaders to consider, and we can offer a distinct perspective on how these questions should be addressed. Capco subject matter experts Joe Anastasio, Matt Cohn and Sandeep Vishnu are available to speak with journalists about the specific impact of banking reform on operational complexity, as well as its potential overall effect on Wall Street's future role in the global marketplace.

10 Key Questions on Bank Regulatory Reform and Its Impact

    1.  What will be the ultimate operational impact if banks are forced to
        extricate themselves from bank holding company status?  What will
        be the cost?

    2.  Will banks spin-off some of their businesses into totally
        independent offshore subsidiaries so they may continue to do
        business that they deem is essential and that the new regulations
        won't allow them to do?

    3.  Will banks consider going back to private partnership status to
        exempt themselves from new regulation?  If so, what does this mean?

    4.  How will U.S. banks compete within the global financial markets
        that operate without the same onerous restrictions?  What does this
        mean for the competitive posture of American financial institutions
        if they are hamstrung by new regulations?

    5.  Are hedge funds going to run completely separately and will they go
        offshore?  How will liquidity in the U.S. market be impacted
        because of this?

    6.  How will Hedge Funds process their business?  Where will they go
        for leverage?  How will they finance their growth?

    7.  What are the ramifications for the prime brokerage business?  How
        do you separate what you're doing for clients and what you're doing
        for yourself?

    8.  How does a firm who's supporting markets that, by its inherent
        design, is forced to take proprietary position risk when they're
        accommodating customer order flow?  Is that going to be restricted?
        Do fund managers then have to fend for themselves if they want to
        reposition themselves or rebalance their portfolios?

    9.  With the repeal of Glass-Steagall, the playing field was leveled
        with international competition and we felt secure enough that the
        two sides -- investment banks and commercial banks -- would not
        necessarily put the financial system into disequilibrium.  Was
        there enough consideration given into long-term system risk
        mitigation?  Did anyone envision the doomsday when "value at risk"
        could not be valued?  If we adopt the Volcker recommendations, do
        we undo all the global competitive level setting that was intended
        when we repealed Glass-Steagall in 1999?

    10. The complexity and cost of reforming our nation's financial
        industry is enormous.  It affects how banks are structured, how
        they operate how they compete in non-US markets and their
        performance in global markets.  As we emerge from "The Great
        Recession," is now really the time to do this?  Is there another

Questions about complexity will be critical, as the debate over the banking industry moves from speculation to legislation. The more policymakers, business leaders and thought leaders discuss the impact of dramatic reform on Wall Street's technologies, processes and systems, the less likely the markets will be rocked by troubling uncertainty.

Contact Information

  • Contact:
    Diana Butler Buxton
    (212) 284-8728
    Email Contact

    Meghan Verdon
    (212) 201-4206
    Email Contact

    Capco News Sources:
    Joe Anastasio
    Partner and Capital Markets Group Co-Leader

    Matt Cohn
    Partner and Banking Group Leader

    Sandeep Vishnu
    Finance, Risk & Compliance Group Partner