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Banks Remain in Regulatory Limbo

NEW YORK ( TheStreet) -- Uncertainty on a host of new rules continues to stall business activity in the banking sector despite the fact that some important milestones have been reached, industry experts say.

Though the passage of U.S. financial legislation known as Dodd-Frank has provided some clarity about the broad outlines of the new rules, many of the specifics were left to the regulators themselves. The legislation mandates the writing of some 235 rules by different regulators. Capital standards for banks is another important issue, but it depends to a great extent on international consensus. While progress is being made, much still has to be decided.

"We're farther down the path than we were four months ago," says Mark Welshimer, deputy managing partner of the financial institutions group at Sullivan & Cromwell.

On the issue of capital, for example, there remains some uncertainty about what beyond common equity will qualify as capital long-term, Welshimer says. He argues that uncertainty is the result of proposals by the Bank of International Settlements, comments on which are due Friday. Until it is cleared up, it may put a chill on capital markets issuances by banks, Welshimer says.

As for M&A in the banking sector, Welshimer does not expect much activity in the short term, "simply because of the difficulties of figuring out at the moment how profitable the bank business will be down the road."

While a lot of what's holding banks back from committing capital relates to the overall economy, regulatory clarity would nonetheless help financial companies better decide where to allocate their resources, says Ken Bentsen, evp of public policy and advocacy at the Securities and Financial Markets Association, a trade group whose board includes senior officers of large Wall Street banks such as Citigroup (C - Get Report) Morgan Stanley (MS - Get Report)and JPMorgan Chase (JPM - Get Report).

Among unresolved issues Bentsen highlighted are Federal Deposit Insurance Corp. rules clarifying which types of asset-backed securities banks will have to partially retain on their balance sheets. Banks will be required to hold on to at least 5% of certain types of asset-backed securities they underwrite--an attempt by regulators to improve the creditworthiness of those instruments. The Wall Street Journal reported Thursday that disagreements about whether other regulators should be able to influence those rules had reignited simmering tensions between Treasury chief Tim Geithner and FDIC chairman Sheila Bair.

Much is still up in the air regarding the Volcker rule, which restricts the ability of banks to invest in private equity and hedge funds and engage in proprietary trading, Bentsen says. There have several reports the rule has provoked various divestitures and executive departures at banks including Goldman Sachs (GS - Get Report), Citigroup and Morgan Stanley. Still, Bensten says his members are uncertain about issues such as what constitutes proprietary trading.

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