Regulators to Take on Too Big to Fail Banks in 2013: KBW

The headline of this story has been changed to reflect the details of the KBW report..

NEW YORK ( TheStreet) -- The political environment will remain tough for "Too big to Fail Banks" in 2013, as regulators continue to implement Dodd Frank rules, KBW analysts said in a report released Friday.

The election of Elizabeth Warren (D-MA) to the Senate and the appointment of Maxine Waters (D-CA), a major critic of large banks, to the top spot of the House Financial Services Committee ensures that congressional pressure on big banks will not subside, according to KBW's Washington Research analyst Brian Gardner.

"Although we believe the rhetoric coming from the Obama Administration toward TBTF banks and "Wall Street" will be less pointed than in President Barack Obama's first term, we expect that some banking regulators will keep up the pressure and Congress will continue to stiff arm the largest financial firms," wrote Gardner.

The debate to break up big banks raged on in 2012, with JPMorgan Chase's ( JPM) disclosure of a multi-billion dollar trading loss providing ample fodder to critics. Former Citigroup ( C) CEO Sandy Weill jumped into the fray arguing big banks should be broken up because there was no way to protect the system from trading losses. Now we have nuns pushing for the bank's break-up.

Recently regulators, especially Fed Governor Daniel Tarullo, have raised concerns that the perception that some banks were "Too Big to Fail" and will be bailed out by the government in the event of a crisis continues to persist. Tarullo has suggested ways to cap the growth of big banks.

Gardner doubts there will be a mandated break-up of big banks but expects the "unrelenting regulatory pressure may lead some banks to consider restructuring."

Meanwhile, the political environment for community banks is "the best it has been in years," says Gardner.

There is also a growing "conservative populism" among many Republicans on the Hill, the analyst noted, referring to recent remarks by Gov. Bobby Jindal arguing that Republicans need to be seen fighting for the middle class rather than big businesses and big banks.

"No doubt community banks continue to chafe under the burdens imposed by Dodd-Frank and the regulators' response to the financial crisis, but we think community banks enjoy better relations with Congress and the regulators than their TBTF brethren and we expect these relationships will only get better over time," writes Gardner.

The bottomline is investors hoping for changes to Dodd Frank are likely to be disappointed. KBW expects the changes to be purely "cosmetic" given Democrats control of the senate. At any rate, any changes are "unlikely to benefit large banks and will be targeted to benefit community banks," says Gardner.

Only 133 rules have been finalized so far under Dodd Frank. Another 133 rules have been proposed but are yet to be implemented, while 132 more are yet to be proposed, even though the deadline for some of rules has already passed.

Gardner expects the Volcker rule, the first wave of nonbank systemically important financial institution (SIFI) designations, heightened prudential standards for bank and nonbank SIFIs, as well as mortgage and risk retention regulations to see the light of day in early 2013.

The analyst also sees a growing role for the Consumer Financial Protection Bureau in 2013, with rules on qualified mortgages likely to be on the top of the agenda. The agency will also likely focus on payday lending and bank overdraft rules by the end of the year.

As for mortgage finance, there may be little progress in addressing the issue of winding down Fannie Mae and Freddie Mac and re-privatizing the mortgage market.

High on Obama's agenda will be replacing FHFA director Edward DeMarco but Gardner wonders if anyone really wants the job. "Part of the reason why there has been no subsequent nomination is the FHFA directorship is not one of the most sought-after jobs in Washington. While housing and consumer groups want to replace Mr. DeMarco with a director who will aggressively pursue principal write-downs on loans held by or backed by the GSEs, finding a person who wants the job and can get confirmed by the Senate is harder than many realize," says Gardner. "We expect that the Administration will try and find a replacement for Mr. DeMarco but we also think he will remain on the job for several months, maybe into the second half of the year."

-- Written by Shanthi Bharatwaj in New York.
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