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7 Dodd-Frank reforms to watch out for in 2012 E-mail

If you liked 2011 implementation, you’re in for more fun, and the occasional opportunity



By Thomas P. Vartanian, a partner in the global law firm of Dechert LLP and head of the firm’s financial institutions practice. He is former General Counsel of the Federal Home Loan Bank Board and former special assistant to the Chief Counsel at the Comptroller’s Office. The Dechert firm helped ABA put together its massive summary of the Dodd-Frank Act the summer of its passage.
The Dodd-Frank Act created a constellation of federal regulators and regulations that will substantially reconstruct the supervision, compliance, and business models of U.S. banks and non-bank financial companies. While many of the new regulatory standards are focused at large banks, there is legitimate worry that they will trickle down to regional and community banks. Federal regulators are clearly aware of the enormous impacts that Dodd-Frank can have. For example, to explain a mere extension of the Volcker Rule comment period by 30 days, SEC Commissioners Gallagher and Paredes recently described that rule alone as having “the potential to dramatically and irrevocably impact the U.S. financial markets.” 

This year will be an especially formative one under Dodd-Frank. Seven separate parts of the act will become effective or potentially be put into use in the year, including:
1.  Systemic regulation. The rollout of systemic regulation on large bank holding companies and the designation of significantly important financial institutions.

2. Volcker Rule. Adoption of this controversial and voluminous regulation.

3. Enhanced and early. Finalization of Section 165 and 166, enhanced supervision and early resolution regulations.

4. Changing FDIC role.
Appointment of FDIC as receiver for non-banks and bank holding companies.

5. Living wills. The filing of living wills by the largest financial companies.

6. Mortgage industry regulation redux.
The rebuilding of the regulatory and business models for mortgage origination, servicing, and securitization.

7. Booting up more CFPB regulation. Initiation of new consumer protection rules by the Consumer Financial Protection Bureau (on top of those that the bureau already gained control over).

  Talk To Power at ABA Government Relations Summit, March 19-21

ABA will hold its annual Government Relations Summit, which is open to bankers, bank board members, and state association executives only, March 19-21. Attendees hear from congressional, executive, and regulatory leaders, and time is set aside for visiting other leaders’ offices to make banking’s voice heard.
    The 2012 theme is “Talk to Power.”
     Featured speakers this year include Sen. Mark Warner (D.-Va.); Indiana Gov. Mitch Daniels (R.); and Chris Matthews, host of MSNBC’s “Hardball.”
    To learn more about the Summit, and the Women’s Leadership Forum that follows it on March 21, click here.  
Not since the reforms of the early 1930s, when many of the country’s current basic banking, securities, and deposit insurance laws were largely put in place, has the financial services industry experienced such a massive overhaul of its business and regulation, in such a short period. These are historic changes, and there is no doubt that financial institutions will adapt, they always have. But that adaption will affect the:

• Cost and availability of financial services to consumers and businesses.
• Extent to which large financial institutions are standardized to reduce the risk of failure.
• Number of banks that markets can support.
• Status of banks relative to their foreign and non-bank competitors.
1. Systemic Regulation
Dodd-Frank seeks to reduce threats to U.S. financial stability by limiting balance sheet risks; increasing capital and liquidity requirements; and reducing the likelihood of economic contagion. Large bank holding companies are beginning to see the future as new regulations take shape. And the law now firmly prohibits the kinds of financial intervention that were used in the most recent crisis, and on its face, ends too-big-to-fail.

Business models of large financial companies are already changing as those that are not already regulated by the Federal Reserve Board attempt to avoid such regulation. At the same time, regulators have the difficult job of balancing the cost-benefit ratio of regulatory reform as they draft hundreds of new regulations. Whatever balance is finally achieved will eventually touch the regulation of every single financial services company in the country, whether in the form of new rules, or new industry best practices.
Things to Watch in 2012
• How will the additional designation of non-bank financial companies as “significantly important financial institutions” (SIFIs) impact the economy and their business relationships with banks?

• What competitive and acquisition opportunities will Dodd-Frank create as large non-bank financial companies restructure or shed businesses, activities, and investments to avoid designation?

• How will the capital markets price large financial institutions, and will they assume that they can now actually fail?

• If regulators use Dodd-Frank to limit acquisitions by large financial companies and banks, how will it impact the value and pricing of the bank capital model and the M&A market generally?
2. The Volcker Rule
The impact of the Volcker rule is only now coming into sharp focus. While the goal is simple and direct, the task of restricting proprietary trading and private equity and hedge fund investments is proving to be incredibly difficult given the complex nature and structure of today’s financial services companies.
Things to Watch in 2012 
• Will the rule’s exemptions be broadened to limit the potential impact on foreign investment managers and funds, and reduce the rule’s extraterritorial impact?

• Will the definitions of “proprietary trading” and “covered funds” be narrowed to avoid impacting a wide variety of investment and securitization activities?

• Will the application of Super 23A/B limitations be narrowed to limit the issues it imposes on financial companies which integrate banking, funds, and investment management services?

• Will insurance and other companies that control insured depositories continue to dispose of them in order to reduce the impact of the Volcker Rule?

(Editor’s Note: ABA lobbyists have also been exploring unintentional consequences of the rule, such as its potential impact on community banks.)
3. Enhanced Prudential Regulation
In December 2010, the industry has its first look at the enhanced prudential standards and early resolution rules that will impact large bank holding companies and SIFIs. They include higher capital requirements, increased liquidity and liquidity management requirements, periodic stress testing, limits on counterparty credit exposures, the creation of risk committees, and the establishment of specific obligations and potential liabilities for their boards of directors.
Things to Watch in 2012
• How will enhanced capital, liquidity and other limitations be applied to non-bank financial companies, such as investment managers and funds?

• With the Fed’s announced reliance on future Basel III requirements, will there be global competition equally with regard to regulatory reform requirements?
4. FDIC As Receiver for Non-Banks
FDIC’s new regulations implementing Title II of Dodd-Frank are in place. FDIC may now be appointed receiver for large financial companies and large bank holding companies, potentially impacting the rules that investors and bondholders are accustomed to. In that regard, Title II largely removes the independent oversight of the bankruptcy court from the equation; pressures FDIC to liquidate the company; and forces the capital and securitization markets to adjust to FDIC rules of repudiation, priorities and preferences.
Things to Watch in 2012
• Will the Treasury appoint FDIC as receiver for a large financial company? Under what circumstances will that occur?

• How will the capital markets react to bank holding companies and SIFIs that are subject to the new FDIC’s receivership authority, particularly with regard to the price of capital and the structure of securitizations?

• Will bankruptcy rules be the principal model that the FDIC follows, or will it graft its own receivership standards onto the process?
5.  Living Wills
Dodd-Frank requires each BHC with assets of $50 billion or more and each SIFI to report periodically on its plans for its rapid and orderly resolution in the event of its material financial distress or failure. That information, to be revised periodically, will be available to assist regulators to evaluate balance sheet risk, understand foreign operations, and develop a comprehensive and coordinated cross-border resolution strategy. Living will requirements may be customized to institutions under $100 billion, and will be required to a lesser degree from foreign corporations.

A living will provides a roadmap for the FDIC to the extent that it needs to prepare for the orderly liquidation of a covered company under Title II. But banks of all sizes should expect that the concepts embedded in the living will process will become part of the everyday regulatory lexicon.

The living will rules also provide another lever that can be used to reduce risk, and restructure large financial companies: If a company does not submit a resolution plan that is acceptable to FDIC and the Fed, the agencies may jointly impose more stringent capital, leverage, or liquidity requirements or restrict the company’s growth or activities. After two years, and following consultation with the FSOC, they may order the company to divest certain assets or operations.
Things to Watch in 2012
• How will the practical components of living wills be determined through the iterative process that each filing entity will be engaged in with regulators?

• How will companies disclose the elements of their living wills to satisfy securities disclosure laws?

• What parts of living wills will regulators determine to be in the public domain?

• Will confidential portions be protected by the courts in the face of challenges, which are sure to come?
6. Rebuilding of the Mortgage Finance Business
The mortgage finance business in this country is in the process of being rebuilt, as is its regulatory system. A combination of new regulations regarding qualified mortgages and risk retention, and pending and executed enforcement orders with state and federal regulators, will change the underwriting, servicing and securitization of mortgages.
Things to Watch in 2012
• Where will the standards for qualified mortgages end up? 

• Will a 20% down payment--a key home-lending facet of Dodd-Frank--survive the rulemaking process?

• Will mortgages sold to Fannie and Freddie be exempt from risk retention, reducing the impact of the 5% risk retention requirement?

• How will the future of Fannie Mae and Freddie Mac be impacted in this election year?
7. The Consumer Finance Protection Bureau
CFPB is in business with a single focus--protection of the financial consumer. It is not charged with any safety and soundness responsibility, and therefore comes to the supervision of banks and other financial companies from a different point of view. While it only supervises banks in excess of $10 billion in assets, its rules and the manner in which they are interpreted and enforced will impact all banks, large and small.
Things to Watch in 2012
• Will the CFPB regulate through rules or enforcement?
• How will it define “abusive” actions?
The challenges ahead are substantial, and the new regulatory mindset with regard to large banks and financial companies will have an impact on regional and community financial services companies as well.

There is no doubt that the next few years will be a time when public sector companies need to work closely with government regulators to make sure that the cost/benefit ratio of regulatory reform is properly calibrated to allow financial services companies to continue to be the vibrant drivers of the economy that they have always been.


In our Digital Magazine for January:
http://pages.nxtbook.com/nxtbooks/sb/ababj0112/assets/icon.gifWhat ABA experts say about legislative outlook in 2012
Will anything move in Congress in this election year?
“Yes, “ say four of ABA’s top lobbyists, but only bills with bipartisan support. One that meets that test and is vital to banks—the Exam Reform Act—has a good shot, they say. This is a key conclusion of our “Washington Outlook 2012,” in our Digital Magazine for January. The quartet of  lobbyists also address the likelihood of reform to the Dodd-Frank Act.

• Read the report, including the special focus “What’s keeping ABA lobbyists up at night?”

Read the online companion on this website, “Grassroots: Frustration drives more bankers to political efforts

[This article was posted on January 13, 2012, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2012 by the American Bankers Association.]    
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