Will reforms hurt banks' profitability?

President Barack Obama unveiled financial reforms this week with the objective of strengthening regulatory authorities and preventing another credit crisis. The reforms call for greater capital restrictions and increased supervision on investment vehicles, leading to reduced leverage and risk in the banking system.

Analysts are concerned that the proposed reforms may impact profitability and competitiveness of banks. "These regulations are so sweeping, so comprehensive and so expensive there's no question about the fact that they will lower the profitability of the industry," says Richard Bove, banking analyst with Rochdale Securities. "As part of these regulations there's a demand to increase capital almost consistently, which lowers the leverage of the bank and lowers its potential profitability." Standard & Poor's, a credit rating agency, has cut its ratings for 18 banks since it expects volatility to remain in the financial sector and the industry to face tighter regulatory supervision. Some analysts say that the government is attempting to increase its control over the entire economy. "These regulations strike me as a floor not a ceiling," said Dave Lutz, managing director of trading at Stifel Nicolaus. "They're going to continue to over-regulate as they see fit and branching out from banks to everybody that has systemic presence in the marketplace."