One year on, most Dodd-Frank changes still to come

July 21, 2011, 8:45 a.m. EDT

One year on, most Dodd-Frank changes still to come

Only 12% of 400 rule-making requirements have been approved

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) — A year after the passage of sweeping financial reform, the biggest changes to the regulatory landscape are still to come.

The 2,323-page statute, named after co-authors Sen. Christopher Dodd and Rep. Barney Frank, was signed into law by President Barack Obama exactly one year ago today. Already big financial institutions are grappling with new debit card swipe fee costs, higher deposit insurance fees and capital restrictions called for in the statute.

Yet, the vast majority of changes -- including structural alterations to big bank business models -- are yet to come.

According to a study by the international law firm of Davis Polk, as of July 1, regulators have completed only about 12% of the 400 rule-making requirements in Dodd-Frank, and further, 122 deadlines set in the statue for adopting key bank reform regulations and issuing studies have been missed.

“This first year has been a shakeout for a lot of the regulators in terms of preparing studies, getting their hands around the key issues that Dodd-Frank has addressed...a lot of work has taken place at conceptual level and it now has to be translated into regulations, much of which will take place over the next 12 months,” said Richard Coll, an attorney at DLA Piper in Washington.

“And there is a lot of pressure from bank lobbyists as this proceeds,” noted Coll.

Regulators have been under intense pressure by Republican lawmakers – and in some cases Democrats -- to slow down or dismantle the new regulations. Republican lawmakers are blocking the approval of key agency heads, including for the chief of a new consumer financial protection bureau, all of which are delaying efforts to adopt the new rules.

The Obama administration claims the bank lobby has so far spent more than $50 million this year to dismantle the regulations, and regulators complain that their approved budgets limit their ability to draft many of the rules in a more timely manner.

Key banks impacted by these rules include Bank of America Corp. , Citigroup Inc. , Wells Fargo & Co. and J.P. Morgan Chase & Co. , yet thousands of smaller banks are affected as well.

Dozens of rules, many of which have a major impact on banks, have been approved, including 11 in July. And even though hundreds of other regulations including key rules haven’t been adopted yet, financial institutions have taken steps to prepare themselves for when they are approved.
What’s been done

One of the most direct impacts of the statute so far is a provision that had little to do with the financial crisis: a watered down Federal Reserve debit-card swipe fee rule that will take effect Oct. 1, shifting billions of dollars in revenue from banks to retailers. Scott Talbott, senior vice president at the Financial Services Roundtable, estimates that it will cost banks $6 billion to $8 billion in revenues. Read about the swipe-fee rule

A number of other major changes have gone into effect, including a measure based on Dodd-Frank and approved by the Federal Deposit Insurance Corp. assessing higher fees on large, risky financial institutions and lower fees for some less-risky small banks for the agency’s deposit insurance fund. The new assessments rates went into effect April 1, and community banks expect that the change will save them $4.5 billion over three years.

Amy Friend, the former chief counsel of the Senate Banking Committee between 2008 and 2010 during the statute’s drafting, contends that a lot has already been accomplished transforming the dialogue in Washington. She pointed to the establishment of the Financial Stability Oversight Council, a group of bank and securities regulators, as a key achievement, because it brings regulators together to discuss common issues.

“I think the dialogue has very much changed and led to a lot of healthy discussion about the direction we should be moving in,” said Friend, now a managing director at the Promontory Financial Group.

Other major regulatory changes impacting banks have already begun to take shape. The newly formed Consumer Financial Protection Bureau, which will write rules for mortgages and other consumer credit products has hired hundreds of employees and officially begins its duties on Thursday.

The Office of Thrift Supervision is in the final stages of being merged into the Office of the Comptroller of the Currency, thanks to Dodd-Frank, making it impossible for troubled institutions to register at the OTS to avoid regulation.

Another big rule impacting big U.S. banks that has been approved is a regulation known as the “Collins amendment” after Sen. Susan Collins, Republican from Maine, the measure’s sponsor.

This provision requires big banks be subject to the same minimum standards for capital as community banks. (Before the rule was established, big financial institutions that had implemented a global bank agreement known as Basel II, named after the Swiss city where past agreements have been reached, were allowed to use their own “internal management assumption” models to calculate how much capital they needed to hold). Read about the Collins amendment
Banks preparing for more changes ahead

However, even though other key regulations are still a ways away, banks have been preparing.

“Banks are doing work to assess their own practices and procedures in anticipation of what the rules will be so that when these rules are finalized they are not caught off guard,” Friend said.

The FDIC expects that it will adopt by August a rule requiring big “systemically important” banks to produce so called “living wills” plans explaining how they can be broken up if they fail. Financial institutions are already preparing for the regulation to take effect, Talbott said.

Bank regulators have yet to approve rules that would restructure big banks, though observers expect these regulations to be established by the end of next year.

The Volcker Rule, named after its author former Federal Reserve Chairman Paul Volcker, is a key yet-to-be-set-up provision in the statute bars most speculative trading by big banks and limits investments in hedge and private-equity funds in an effort to reduce risks to the broader financial system.

Talbott added that big banks are preparing separately capitalized affiliates to handle some of their derivatives trading, in response to a key provision in the statute authored by former Democratic Arkansas Senator Blanche Lincoln. However, regulators haven’t approved rules on the subject yet.

Regulators are also still in the midst of approving a measure -- central to the reform efforts of Dodd-Frank -- that would dismantle a large failing Lehman-like mega-bank so that its collapse doesn’t cause a ripple effect and unsettle the markets.

The liquidation rule allows the FDIC to use taxpayer dollars to make payments to certain creditors and counter-parties of a failing mega-bank so they don’t fail as well. However, the agency still has to set up a key part of the mechanism to collect fees from big banks to recoup costs to taxpayers.

About 36 big banks with $50 billion or more in assets will need to pay fees to cover taxpayer costs, but other institutions that engage in financial activities that have yet to be designated by regulators will also be stuck paying the bill.

These yet-unnamed institutions will need to hold more capital to protect against their failure. That process is also still playing out as U.S. regulators negotiate with their international counterparts over how much more capital some of the largest banks -- in the U.S., Europe and elsewhere -- will need to hold.

Big changes for how banks participating in the $450 trillion derivatives market are still to come, with many regulations for transparent swap clearinghouses, reporting and capital not expected to be approved until December.

It’s unclear whether a major provision requiring banks to hold “skin in the game,” namely, by retaining 5% of the risk of loans they package and sell, will be approved next year. Regulators and lawmakers are squabbling over a related measure that would exempt certain high-standard mortgages with 20% down-payments from the risk-retention rule.
Community banks have clarity

Most of the Dodd-Frank rules impacting small banks have either been approved or have been proposed, said Chris Cole, senior vice president at the Independent Community Bankers of America. He argued that the Fed’s swipe-fee rule is a negative for community banks while the changes to the FDIC’s deposit insurance fund assessments are a positive.

Other key positive provisions for community banks, Cole added, include a measure in the statute extending until 2012 a “Transaction Account Guarantee” program created in October 2008 which gave companies unlimited support for their non interest-bearing business checking accounts.

“That’s been a real plus for community banks in heavily impacted areas,” Cole said. “It’s allowed us to compete against the ‘too-big-to-fail’ banks for that business.”

Ronald D. Orol is a MarketWatch reporter, based in Washington.



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