Dodd-Frank Enters Its Terrible Twos

two-yrs-old.jpgI’ve been writing about the banking and financial services industry since the mid-1980s and during that time, only the Federal Deposit Insurance Improvement Act of 1991, which was enacted after an earlier banking crisis, and the Sarbanes-Oxley Act of 2002, which was a byproduct of corporate accounting scandals such as Enron, come close. But those reform laws were much narrower in their focus, and much less ambitious. I don’t believe that even the Glass-Steagall Act of 1933, the historic Depression-era law that separated commercial and investment banking, was nearly as broad in scope as Dodd-Frank, although banking and the capital markets in the 1930s obviously weren’t as large and sophisticated as they are today.

And that might be why the federal regulatory agencies that were tasked to write nearly 250 new rules have fallen well off the pace that Congress set for them when it passed Dodd-Frank. According to a recent analysis by the Davis Polk law firm, approximately 63 percent of the required rules whose deadlines have passed have either not been proposed or not finalized. “The deadlines were always ridiculously unrealistic, which is something I tried to say at the time,” says former Comptroller of the Currency John Dugan, now a law partner at Covington & Burling in Washington.

“Some of the regulatory agencies just don’t have the staff resources” that are required to write a blizzard of new rules, adds Brian Gardner, senior vice president for Washington research at the investment banking firm Keefe, Bruyette & Woods. Gardner says that in particular the Commodity Futures Trading Commission has struggled to write new rules for how the derivatives market will be regulated going forward, although it has made progress.

Dugan, who finished his five-year tenure at the Office of the Comptroller of the Currency just three weeks after President Barack Obama signed Dodd-Frank into law, believes its greatest impact has been the Durbin Amendment—which allows the Federal Reserve to regulate the amount of debit card interchange fees that banks may charge—and the establishment of the Consumer Financial Protection Bureau (CFPB).

I would concur with Dugan’s assessment. According to the consulting firm Novantas LLC, Durbin-inspired restrictions on debit card income will cost the industry upwards of $5.75 billion in annualized revenue—and this at a time when many banks are struggling to grow their top lines because of poor loan demand. And by creating the CFPB, Congress established a new regulatory regime for the consumer financial services marketplace. This new regulator, which I wrote about in our second quarter issue, potentially could have an enormous impact on the banking industry over time.

Interestingly, Gardner says the bureau has moved more slowly to exercise its enforcement and rule making authority than he would have expected at the two year mark. He also believes the presidential election could have a significant impact on the bureau’s future. You’ll recall that CFPB Director Richard Cordray received a recess appointment from Obama when Senate Republicans blocked his confirmation over their displeasure with how the bureau was structured.  Should Obama lose to Mitt Romney and the Republicans also take control of the Senate, a President Romney would be able to appoint a director more to his liking—presumably, one less inclined to meddle in the industry’s business. “You could see the bureau taking a different direction,” Gardner says.

There is still a lot of work ahead for all those beleaguered federal regulators, including the writing of the hotly debated Volcker Rule—which would severely restrict the proprietary trading activities of commercial banks. Also yet to be finalized or in some cases even proposed are new rules on securitization, new capital requirements for banks and several very important initiatives in the mortgage area. The CFPB has been tasked by Dodd-Frank to develop a qualified means test to determine whether a borrower has the ability to repay a loan. A group of federal regulators has also been working on a new risk retention rule that would require lenders to retain 5 percent of the loans they sell into the securitization market, although an initial proposal would have exempted securitizations made up of qualified mortgage, commercial or auto loans from the requirement. These rules have not been finalized yet and until they are, mortgage originators who sell their loans to third parties that securitize them won’t know how much capital (if any) they will have to set aside to meet the requirement.

The House Committee on Financial Services will be holding hearings this week on Dodd-Frank, and if you didn’t already know how House Republicans feel about it, all you have to do is go to the committee’s website (, where you’ll see a full throated attack on the law. Repealing Dodd-Frank is a dream that many Congressional Republicans have, but that’s as unlikely as the country going back on the gold standard. Even if Romney beats Obama and Republicans hold the House and regain the Senate, Congressional Democrats might still have enough strength to frustrate their plans. “I think it would be very difficult to get a full repeal of Dodd-Frank,” says Dugan.

And that means, like it or not, the most detested financial reform law of all time will probably be around to celebrate many more birthdays. 


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.