Chapter 2: Forces of Change
Benton E. Gup Some of the major factors that determine the success or failure of ﬁnancial institutions are beyond their control. These forces include, but are not limited to laws, globalization, technology, competitors, activist investors, demographics, and changing business models that are discussed below. Selected US federal legislation Federal and state laws and regulations limit the activities of ﬁnancial institutions. In this section, we examine three federal laws directly tied to ﬁnancial institutions, and some of their consequences to illustrate how laws can bring about changes in the ﬁnancial system. Federal laws do not have to be directed at ﬁnancial institutions in order to have an impact on them. As noted in Chapter 1, the Sarbanes-Oxley Act of 2002 (SOX) was enacted as a reaction to the scandals and bankruptcies of Enron, WorldCom, and other ﬁrms in order to deter ﬁnancial misconduct. The law has resulted in such high compliance costs for publicly-traded companies that some ﬁrms are going private, or changing their listing to foreign stock exchanges. Robert Grady, who runs the venture capital arm of the Carlyle Group, argues that Intel, Cisco, and E*Trade probably would not have public oﬀerings today because of SOX.1 Financial Executives International reported in 2005 that the average cost of complying with SOX Section 404 was $4.36 million.2 “Going private” means that a company reduces its shareholders to fewer than 300, and is no longer required to report to the Securities and Exchange Commission.3 Many de novo ﬁnancial institutions are privately...
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