It’s been two years since the Dodd-Frank Act was passed, and regulators have published 8,800 pages of regulations ironing out the details of the law. Many rules still have not been written, leaving huge portions of the Act in limbo. This article takes a look at the status of major pieces of the legislation with an eye towards the impact on commercial banks and the banking system.
1. SYSTEMIC RISK
About: The recent financial crisis highlighted risks taken by individual companies in a highly interconnected financial sector. Dodd-Frank established a framework for monitoring and regulating this systemic risk.
Past Developments: The newly created Financial Services Oversight Council released its final rule for designating nonbank systemically important institutions. The top banking firms recently released their “living wills,” or plans to unwind themselves in the event of failure without government or taxpayer assistance.
Future Developments: The Federal Reserve will finalize capital requirements for large institutions as well as the specific rules for implementation of Basel III, an international agreement that strengthens capital requirements and adds new regulations on bank liquidity and leverage.
—From: Weil, Gotshal & Manges LLP, “The Dodd-Frank Act: Two Years Later,” For access to their full report, click here.
2. THE DURBIN AMENDMENT
About: The Durbin Amendment part of Dodd-Frank, which caps debit card interchange fees for banks above $10 billion in assets, has likely had the greatest immediate impact on the banking industry, as it went into effect in October of last year.
Past Developments: The impact on banking revenues has been swift. The industry reported a $1.44 billion loss of revenue in the fourth quarter of 2011, resulting in an annualized $5.75 billion loss if this pattern holds, according to Novantas LLC, a New York City-based consulting firm.
Future Developments: It is still uncertain whether banks under $10 billion in assets will be able to charge more for debit card interchange than bigger banks in the long term, but so far, the smaller banks haven’t reported a loss of income in aggregate.
About: Dodd-Frank requires institutions to show that their incentive arrangements are consistently safe and do not expose their firms to imprudent risk.
Past Developments: The Securities and Exchange Commission implemented rules last year requiring publicly traded companies to take advisory shareholders votes on executive compensation, also known as “say on pay.” It also implemented rules on the independence of compensation committees and compensation advisors, as well as on “golden parachute” payments to executives.
Future Developments: Dodd-Frank included a provision that instructed agencies to issue guidelines on incentive compensation. Although proposed more than a year ago, they have not been finalized.
—From the Securities and Exchange Commission and Deloitte LLP’s “Dodd-Frank Act Two-Year Anniversary: Seven Takeaways on Dodd-Frank’s Impact on Compensation.” For access to their full report, click here.
4. CONSUMER FINANCIAL PROTECTION BUREAU
About: The CFPB is the first federal agency focused solely on consumer financial protection, and it holds responsibilities previously managed by several other regulators. The CFPB has examination authority over banks, thrifts and credit unions with $10 billion or more in assets, as well as some large nonbank financial service companies that previously escaped federal regulation, such as payday lenders.
Past Developments: With a new director in place, the CFPB has not simply been implementing rules it inherited from other regulators, but promulgating many new, substantive rules.
Future Developments: Further rulemaking may help illuminate the meaning of “unfair, deceptive and abusive” acts and practices, which the CFPB is tasked with eliminating, especially in the context of mortgage servicing and origination. New mortgage disclosure documents are in the process of being finalized.
—From Weil, Gotshal & Manges LLP, “The Dodd-Frank Act:Two Years Later.” For access to their full report, click here.
5. MORTGAGE ORIGINATION AND SERVICING
About: Dodd-Frank amends the residential mortgage portions of several federal housing statutes. Among other things, mortgage originators now owe a duty of care to borrowers.
Past Developments: Creditors are now required to make a reasonable and good faith determination that a consumer has a reasonable ability to repay a residential mortgage.
Future Developments: The CFPB is considering rules to implement provisions of Dodd-Frank that would address mortgage loan originator qualifications and compensation.
—From Morrison & Foerster’s “Dodd-Frank at Two.” For access to the full report, click here.
About: The Dodd-Frank Act is designed to provide a comprehensive framework for the regulation of the over-the-counter derivatives market to provide greater transparency and reduce risk between counterparties.
Past Developments: The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have both been missing statutory deadlines.
Future Developments: It is yet to be determined specifically how these provisions will be applied across borders and to what extent they will cover U.S. operations of foreign firms.
—From Deloitte LLP’s “Dodd-Frank Act Two-Year Anniversary: Five Takeaways on Dodd-Frank’s Impact on Derivatives.” For access to their full report, click here.
7. THE VOLCKER RULE
About: The Volcker rule prohibits banks and bank holding companies from engaging in proprietary trading or owning private equity and hedge funds, with some exceptions. It is considered one of the most controversial aspects of Dodd-Frank.
Past Developments: The Fed, FDIC, OCC, and SEC jointly issued the proposed rule, which further defined key terms such as “banking entity,” “proprietary trading,” and “covered fund,” as well as outlining exceptions to the rule’s prohibitions. If proposed in its present form, many investment products having nothing to do with private equity or hedge funds will be prohibited.
Future Developments: Lawmakers and regulators are pushing for the final rule by the end of the year, but affected financial institutions will have until at least July 21, 2012 to conform to the rule.
—From Weil, Gotshal & Manges LLP, “The Dodd-Frank Act: Two Years Later.” For access to their full report, click here.
8. CAPITAL REQUIREMENTS
About: Based on “lessons learned” from the financial crisis, regulators are examining more critically the quality of capital held by U.S. banking organizations as well as credit risks.
Past Developments: In early June 2012, the U.S. banking agencies published for comment a series of three regulatory capital rulemakings in accordance with the international Basel III agreement, two of which would substantially revise the current regulatory framework. Comments on the proposals are due September 7.
Future Developments: Many of the new capital guidelines and rules haven’t gone into effect and will be gradually phased in over a period of a year or up to a decade, depending on the size of the bank and the rule.
—From Morrison & Foerster’s “Dodd-Frank at Two.” For access to their full report, click here.