A House bill marking the most sweeping changes to banking regulations since the Great Depression drew fire from critics who said it could spur U.S. bankers to jump ship and head for less regulated banking hubs.
"When you act to regulate financial institutions, companies could be left at a comparative disadvantage," said Andy Busch, a global currency and public policy strategist at BMO Capital Markets, of the bill he said placed too many restrictions on banks.
Busch said U.S. financial institutions could pack up some of their U.S. businesses most
likely derivatives and move on if they feel the competition is unfair.
Talented employees could also jump ship and head to less regulated countries, he said.
Unlike many other industries, the financial sector is " technology and people intensive,"
allowing much flexibility for employees to choose where they work, Busch wrote in his newsletter.
"This means that if one bank can't pay industry levels of compensation, those assets can
move quickly to another firm or another country."
Indeed, Deutsche Bank AG Chief Executive Officer Josef Ackermann recently told Bloomberg that Germany has a "comparative advantage" over other financial centers because it does not plan to tax bonuses.
That contrasts sharply with nations such as England, which this month announced a one-time, 50 percent tax on bonuses exceeding 25, 000 pounds. France followed suit and announced a tax on bonuses of more than 27,000 Euros, Busch noted.
Other experts, however, dismissed the idea that the bill will spur a Wall Street exodus, at
least any significant one.
"I haven't seen any new regulations (in the bill) that suggest that competitiveness will lose
out," said Jaime Peters, a banking analyst at Morningstar, an independent research provider.
The type of legislation moving through Congress is a common theme around the world and not detrimental to business, she said.
"The idea of U.S. bankers going to Germany or somewhere else could happen but won't happen enough to be a fatal blow," she said.
The House bill, which passed in spite of no Republican votes, is designed to prevent another financial crisis at a time when the economy is clawing its way out of the deepest recession since the Great Depression.
The legislation outlines more oversight, higher capital requirements for financial companies and requires those firms to pay into an emergency fund used when a bank or financial
institution hits a crisis.
The government would also create a new Consumer Financial Protection Agency to oversee mortgages, credit cards and other financial products.
Douglas Elliott, a fellow at the Brookings Institution, said a bill containing a tax on bonuses could hurt banks' competitiveness, unless all major banking centers do the same.
And if a final bill contains restrictions on compensation, it could lead to executives jumping ship and heading to banks that are not subject to those rules.
Still, he does not expect the final legislation to contain any significant taxes.
"The House bill is probably 75 percent right," he said. "The balance between too much
and too little regulation is a difficult one to achieve. The bill is extremely complex. I agree with most parts but not all."
Also raising critics' eyebrows is regulators' push for banks to lend more prudently, which comes at a time when Obama wants more lending for small businesses, a seeming
contradiction.
"Regulators in the U.S. are pushing banks to set aside capital and be stingier in loans,which is opposed to what the president wants, which is to lend to small businesses," Busch said.
With the passing of the House bill, the exercise of regulating banks is only half over, with Senate legislation in the pipeline and a final bill expected sometime next year.
That has Wall Street scrambling to influence the outcome, with the financial sector contributing higher-than-usual amounts to the campaigns of key members of Congress.
So far, Wall Street has won a number of concessions, such as limits on the influence of a
new consumer protection organization and ways to circumvent rules regulating the multi-trillion dollar derivatives market that helped spark the recession, reported the Christian Science Monitor.
Still, the White House applauded the bill, saying Washington policies played a significant
role in spawning the financial crisis.
"The crisis from which we are still recovering was born not only of failure on Wall Street,but also in Washington," said U.S. President Barack Obama.
"We have a responsibility to learn from it, and to put in place reforms that will promote
sound investment, encourage real competition and innovation, and prevent such a crisis from ever happening again." Treasury Secretary Timothy Geithner also weighed in.
"The president set forth clear objectives and principles for reform that were endorsed by
Congressional leaders," he said.
"House passage of this bill moves us an important step closer to meeting the president's
objectives for reform," Geithner said recently in a statement.