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11:17 a.m.

Amanda Drury: Today in Philadelphia the 14th Annual Leadership Conference is underway. Hot topics, of course, including regulatory reform, and what our next guest calls the looming debt crisis in the United States. Well, joining us now in a CNBC exclusive Robert Kelly, BNY Mellon CEO. Let’s talk finreg. How do you see fin reg affecting you?

Bob Kelly: Well, it's an interesting time, actually, and thank you for doing this, and allowing me to be on the show this morning. It’s -- I think regulatory reform will happen. It’s happening relatively soon. Probably finalization in the next few weeks, and maybe assigning by the fourth of July, but there are some good things in the proposals that I think are excellent. You know, the most notable ones is the resolution authority and that is absolutely necessary, so we don't have another Lehman type event, and there are some other things that will be overall good for the economy.

Amanda Drury: What would you throw out?

Bob Kelly: Well, one thing I’m concerned about is the Collins amendment where there are proposals on the table to have certain capital ratios for some banks. I’m not sure that's productive at this point because the United States Treasury and the Fed and a number of the countries around the world on the Basel Three regulations and we want to be careful not to get ahead of the rest of the planet, and we want to insure that we don't have too much capital, but on the other hand, we want to make sure we don't have an unleveled playing field with the rest of the world either, because we don't want to operate at a competitive disadvantage versus, say, the Europeans or the Asian banks.

Larry Kudlow: Mr. Kelly, FASB the accounting standards board is talking about putting out a new regulation that would require all banks to mark to market, and that's mark to trading market all their loans and all their securities. I interviewed Paul Volcker and Bill Isaac the other day about that. They think it's one of dumbest ideas in the history of the planet. i wonder what your take is. FASB mark to market, all loans on your books as well as securities.

Bob Kelly: Well, we already have mark-to-market for securities largely, mark-to-market for loans, it might be one of the dumbest things we can do in the galaxy. In the case of securities. It only affects a dozen banks, including ourselves. In the case of loans, we have 8,000 banks in this nation, and that is way to pro-cyclical. I could see that there would be some hedge funds, for example, who would love to see a mark to market environment on loans, because it would create more income volatility and, therefore, opportunities to create more earnings over time, but the reality is most loans are one-offs that are individually negotiated. It would be very, very difficult to find mark to market prices for any of those loans. More importantly, though, essentially all banks in the nation and every downturn would be insolvent, and that is the last thing our nation needs right now.

Larry Kudlow: Very clever. Very clever idea by the accountants. I’m sorry.

Amanda Drury: No, absolutely. Obviously, companies, banks, you name it. People have a lot of things to deal with right now, and financial regulation is just one of them. There are also things like Fedex was mentioning this morning like, you know, increasing taxes down the line. You have health care costs to take into account. In this environment, Bob, do you feel that you're in a position to keep on growing, keep on hiring?

Bob Kelly: Well, it's a good question. the -- I do worry about at this point in the cycle adding to any of our industries in terms of taxes or regulatory costs because we are just in the early phases of getting our economy working again. We had GDP growth, unemployment has more or less bottomed out and is starting to improve. Housing has leveled out, and 12 of the 20 cities in America now who are actually up a little bit year-over-year. All of those things are good, but we do have to think about additional costs in the context of what impact will this have on GDP growth or lending or ultimately job creation over the next four or five years, and I do worry that this could really slow down our economic outlook.

Amanda Drury: Is this going to interfere with your hiring plans?

Bob Kelly: Well, it isn't. From the standpoint that we're very fortunate in that not only we are the oldest bank in the nation, but we're also the healthiest. We have our debt trades at the tightest spreads over treasuries of all the major banks in the United States, and we the highest debt ratings by Moody's and Standard & Poor's. We’ve been able to take that advantage and a very strong balance sheet to work to our advantage. In fact, we've been acquiring in this environment. Today we have -- we are in 34 countries around the world. We have 42,000 people. At the end of this month we're actually adding 5,000 people through acquisitions in the United States and including people in Ireland and Poland and on August 1st we're actually closing on an acquisition in Germany where we are moving from the 15th largest processor in Germany to number two overall. We are trying to take advantage of this environment to strengthen our businesses and become more global and become more relevant to our clients, as one of the strongest processors in the world.

Larry Kudlow: Bob, before we lose you, let's just ask you, two financial reg ideas are probably going to get through this week in the conference committee. How does it affect your bank? Number one, derivatives may be spun off from the special bank into a holding company affiliate with new capitalization. That’s number one. Number two, it looks like Paul Volcker’s rule will go into play, i.e., no proprietary trading, no hedge funds, and no private equity investments. How might those rules affect your bank?

Bob Kelly: Well, again, those are pretty important concepts. We are not big in the derivative business, but we are in the business. It is largely an interbank business, but it serves the needs of a lot of clients, corporate clients, small business, medium size, and large size. Not in the U.S. not just the U.S., but around the world. by having a separately incorporated subsidiary, a subsidiary of the holding company, I'm not sure that's going to work, because I don't think you can put enough capital into a subsidiary of any of the major banks to allow it to operate on a stand-alone basis and, let's be honest here, when you step away back from it, derivatives were not the problem with our economic downturn. What are we solving?

Larry Kudlow: Nor was prop trading for that matter, but you're going to be penalized there. Is that going to affect your operations?

Bob Kelly: Well, not prop trading. We are not a prop trader, per se. What we do have some concerns about is the fact that there is under the existing proposal, 25% of our business is asset management and the proposal as it stands at the moment would say that we couldn't create new funds by putting seed money into the funds in any of our funds that are unregistered, and that's kind of our rnd for new product development. Our hope is that gets modified either up front or over time.

Amanda Drury: We’ve only got ten seconds, but you talked about the looming debt crisis in the U.S. give us a time frame, and do you see it, for example, as bad as some of the Euro zone countries?

Bob Kelly: Most important thing to remember is that foreign people, foreign institutions will keep buying our bonds until they stop.

Larry Kudlow: That’s one way to put it.

Bob Kelly: It’s a complex concept. I don't know when it's going to happen. Is it a year from now, three years from now, five years from now? We have to deal with our deficits, and we have to deal with our debt crisis, and as soon as we do it, we're heading towards a train wreck if we don't.

Larry Kudlow: Thank you very much.