Dodd Frank Act Impact On Us FI Risk Profile and Small Business Lending Capacity 12.16.2011

1. Dodd-Frank Wall Street Reform and
Consumer Protection Act:
Impact on US financial institutions’ risk
profile and small business lending capacity
Presented by: Nina Covrljan,
CnC Partners
Date: 12/16/2011

2. Overview:
• Legislative background: Dodd-Frank Wall
Street reform and Consumer Credit Protection Act
• Financial institutions: industry profitability
impact
• Community banks: impact on credit and non-
credit services
• Q&A

4. Legislative background:
• Dodd-Frank Act: Most comprehensive overhaul of
bank regulations since the 1930s.
• Created in response to perceived regulatory
deficiencies which enabled for systemic risk
concentrations that led to the 2008 financial crisis.
• Establishes a new framework for monitoring and
addressing institutions which pose systemic risk. The
Act also requires 243 rulemakings and 67 studies.
Source: Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376(2010) [hereinafter Dodd-Frank Act]

5. Legislative background (cont’d):
Key aspects of the legislation:
• Regulatory agency consolidation: elimination of
the national thrift charter; establishment of new
oversight council for systemic risk evaluation.
• Financial markets regulatory overhaul: increased
derivatives trading transparency.
• Consumer protection agency: establishment of
new oversight body; uniform standards for “plain
vanilla” products as well as increased investor
protection.
Source: Dodd-Frank Act

6. Legislative background (cont’d):
• Additional tools for financial crisis management:
resolution regime for orderly unwinding of
troubled institutions; proposal for extended
Federal Reserve powers (credit extension “in
extremis”).
• Increased international standards and
cooperation: improved accounting and tightened
regulation of credit rating agencies.
Source: Dodd-Frank Act

7. Exhibit 1: Dodd-Frank and Basel III
reforms summary
Source: McKinsey working papers on Risk, no. 25, March 2011

9. Financial institutions: industry
profitability impact
• Dodd-Frank Act: establishes mandates for higher
capital requirements, limits on proprietary trading and
OTC derivatives, interchange fee limits, and
mandatory retention of at least 5% on securitizations
(except mortgages).
• Significantly higher regulatory costs for financial
institutions deemed to pose higher systemic risk (e.g.
FDIC insurance costs, liquidation costs).
• Increased operating costs: new risk management
requirements, increased investor protections and
reporting requirements.
Source: Dodd-Frank; Barclay’s Capital Analysis; McKinsey Analysis

10. Financial institutions: industry
profitability impact (cont’d)
Consumer DDAs-2009 estimated profitability
impact (1)
Pre-tax profit 21%
Pre-tax profit after Reg. II Min. 13%
Pre-tax profit after Reg. II Max. -2%
Capital and funding requirements-2010 %
estimated impact (2) increase
Capital requirements at 8%, Tier 1 common, 9.5% total ~60%
Tier 1 ~ $591 bn
Short-term funding requirement (LCR) ~ $794 bn ~45%
Long-term funding requirement (NSFR) ~130%
(1) Source: BIS;SNL; RMA; analysis; Barclay’s Capital Analysis; McKinsey Analysis
(2) Ibid

11. Financial institutions: industry
profitability impact (cont’d)
• Increased capital requirements, funding and
compliance costs will result in further Bank
restructuring and rationalization of credit and non-
credit services.
• As a result, continued consolidation and segment
divestitures will result in ripple effects throughout the
financial industry.

13. Community banks: impact on credit
and non-credit services
• Community banks will experience increased competitive
pressures due to continuing industry consolidation trend as
well as increased regulatory requirements; likely to
experience difficulty offering consumers and small
businesses competitive rates on deposits and loans.
• Service rationalization and credit tightening:
• Due to higher operating costs, community banks are
likely to institute fees for services that are currently
offered free of charge (e.g. debit cards, checking
accounts, online or mobile banking).
Source: Congressional hearing “The Effect of Dodd-Frank on Small Financial Institutions and Small Businesses”, testimony of
James D. MacPhee, CEO Kalamazoo County State Bank (member of Independent Community Bankers of America), March 2011

14. Community banks: impact on credit
and non-credit services (cont’d)
• Rules which stipulate “plain vanilla” products
(credit cards, mortgages etc.) are expected to
have an adverse effect on community banks as
product customization will be limited.
• The “Durbin” amendment - sets forth significant
changes regarding debit interchange fees and the
economics of consumer banking.
Source: Congressional hearing “The Effect of Dodd-Frank on Small Financial Institutions and Small Businesses”, testimony of
James D. MacPhee, CEO Kalamazoo County State Bank (member of Independent Community Bankers of America), March 2011

15. Community banks: impact on credit
and non-credit services (cont’d)
• According to ICBA, community banks are not effectively
protected under the statutory exemption for small credit
card issuers (less than $10 bn in assets).
• Small FIs may benefit from the two tier pricing system
only to a limited degree, as the new regulations grant
retailers (vs. FIs) the choice of network routing. Large
retailers will further compete via low interest rate credit
cards community banks will be forced to match or
potentially exit.
Source: Congressional hearing “The Effect of Dodd-Frank on Small Financial Institutions and Small Businesses”, testimony of
James D. MacPhee, CEO Kalamazoo County State Bank (member of Independent Community Bankers of America), March 2011

16. Community banks: impact on credit
and non-credit services (cont’d)
• The combined effect of increased competition, operating
costs and reduced product profitability will likely result in
rationalization and reduction of non-credit services.
• As fee revenue from non-credit services is reduced,
community banks are likely to increase interest rates on
credit products in order to compensate for the loss of non-
credit revenue.
• In addition, credit availability will be diminished due to
lower compensating balances, higher cost of capital and
more stringent underwriting standards. New borrowers are
likely to experience higher interest rates and more stringent
qualifying criteria, while borrowers whose credit rating may
have suffered are likely to pay higher interest rates for an
extended period of time.

17. Q&A