What will give U.S. bankers ulcers in 2012

at 04:00 PM ET, 01/03/2012

Despite the ongoing economic slump and warnings of burdensome new regulations, the U.S. financial system remained surprisingly robust and resilient through the end of 2011 — in no small part because of the havoc that the Euro crisis wreaked upon other countries. In 2012, the big fights over regulation at home and the Euromess abroad will continue to be front and center, and U.S. financial institutions will largely remain on the defensive. Here are three key issues that will be at stake in the early months of this year:
(AP)

1) Can Europe pull back from the brink? The fate of the Eurozone will continue to be the most single important factor affecting the global economy and the U.S. financial system. For the moment, Europe doesn’t appear to be headed off a cliff. But everyone will be watching to see if the latest interventions, austerity promises and lending will be enough to restore confidence and liquidity to the continent. In the next few weeks, Italy, Spain, France and other key countries will be holding government-bond auctions that will show whether there is any revived appetite for European sovereign debt. Private European banks will also have to refinance a hefty portion of their own bonds as well, the Wall Street Journal points out.

Early signs haven’t been terribly heartening. Italy fell so short of its auction targets that the European Central Bank reportedly stepped in after the auction to prop up the bonds, as the Guardian reports, and the Euro subsequently fell to its lowest level in more than a year. If things devolve seriously in Europe, it could roil U.S. markets and put a damper on the growing signs that the U.S. economy could finally be recovering.

2) What will happen to the most unwieldy, controversial new bank regulation? When it comes to Dodd-Frank, there’s little that concerns U.S. banks more than the Volcker Rule. It’s meant to curb speculative bets that banks make for their own benefit — known as “proprietary trading” — rather than that of their customers. But those in the finance community warn that this could make lending far more difficult. By limiting this kind of proprietary risk, “the unintended consequences could be even less access to capital, higher borrowing costs, etc.,” Mark Spindel, founder of the Potomac River Fund and a former World Bank official, tells me.

Lobbyists, consumer advocates and other concerned individuals now have until Feb. 13 to make their case to the regulators. The shape of the debate and the final rule that’s produced will be a huge test of whether Wall Street reform can succeed in curbing undue risk without major unintended consequences.

3) Will Congress pitch another fit over the debt-ceiling and the payroll tax? In principle, both of these should be non-issues on Capitol Hill. Last August’s bipartisan debt-ceiling agreement should green-light the next debt-ceiling increase, which is coming up in the next few weeks. And leaders of both parties seemed to agree that the payroll tax break that expires at the end of February should be extended for the full year. But the same conservative Republicans who led the backlash against these measures in 2011 can be expected to do so, to some degree, in 2012. House Republicans are already insisting on a full vote on the debt-ceiling increase, bypassing a simpler pro-forma measure to raise it last week. Any backwards movement on August’s deal — either in terms of the debt-ceiling itself or the triggered cuts that some Republicans have vowed to repeal — could be debilitating for the country’s economic and financial outlook.

Further, last month’s bloody debate over the payroll tax only resulted in a two-month extension — which means they will be another round of congressional brinksmanship over the provisions come February. Boehner has convened a bipartisan conference that’s supposed to hammer out a deal, but the supercommittee’s recent failure doesn’t make these efforts too encouraging.

 
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