Banks still waiting on most Dodd-Frank rules


U.S. Rep. Barney Frank (D-Mass.). (Darren McCollester/Getty Images)
December 25, 2011

A year and a half has gone by since the Dodd-Frank financial reform act was signed into law, but barely a quarter of the rules in the legislation have been finalized, though federal regulators are rolling out key components of the bill.

Regulators released a highly anticipated proposal on capital and liquidity requirements last week, several weeks after issuing a long-awaited rule on bank trading activity.

The proposals are subject to comment periods and possible amendments before they take effect. As of Dec. 1, regulators have issued 154 proposals, finalized 74 of them and missed 200 deadlines, according to a monthly progress report by law firm Davis Polk.

Bankers have complained that the slow-going implementation makes it difficult to get a handle on added compliance costs and regulators’ expectations. Regulators argue they are moving as fast as they can considering 30 federal agencies are tasked with writing some 400 rules of varying complexity.

There is still a ways to go before the full impact of the legislation is felt, more than half of the rules are not due until 2012 or later. But there has been meaningful movement in the past year.

Capital standards and early remediation

This latest proposal to come out of the Federal Reserve includes detailed provisions on capital requirements, risk management and measures to address financial weakness. These regulations are aimed at banks with $50 billion or more in assets — covering roughly 30 banks, including McLean-based Capital One Financial, as well as any non-bank firms that are deemed systemically important.

Key within the 173-page proposal is a rule requiring banks to develop annual capital plans, conduct stress tests and maintain risk-based capital ratio greater than 5 percent of assets. These requirements, if adopted, would be implemented in two phases.

Another important aspect of the proposal calls for early remediation requirements to tackle any financial weakness. Triggers for such remediation would include poor stress test results, capital levels and risk-management weakness.

Banks can comment on the regulations up to March 31, and would have a year to comply with most of the finalized standards.

There are other capital provisions in place, namely the Collins amendment, which establishes a capital floor for all banks.

Executive compensation

There are at least a dozen provisions in Dodd-Frank that seek to rein in executive compensation. Earlier this year, the Securities and Exchange Commission instituted one measure that gave investors a “say on pay” at annual shareholder meetings. Though the vote is nonbinding, boards have discretion to change pay packages based on shareholder sentiment.

Protests against pay packages for this year have been scant, but corporate watchdogs anticipate they could pick up in 2012. Opponents of excessive executive pay were expecting a batch of proposals this month, including disclosure of the ratio of CEO-to-median-employee pay and marketwide proxy access. The proxy rule is designed to make it easier for shareholders to nominate independent directors or a slate of candidates for the board.

The SEC, however, postponed the rulemaking until 2013, after the U.S. Court of Appeals struck down the proposed marketwide proxy in the summer. The court said the SEC failed to adequately consider the costs of the rule.

Volcker Rule

Named after former Federal Reserve Chairman Paul Volcker, the rule would prohibit big banks from trading for their own profit, a practice known as proprietary trading, and owning hedge funds. The purpose of the provision, unveiled in October, was to bar banks that benefit from government protections, such as deposit insurance, from making risky trades that only line their pockets.

Critics of the rule say it could limit credit availability and reduce market liquidity. They also claim that it will prohibit banks from hedging their risk against swings in interest rates or currencies.

“It’s a very elaborate proposal,” said Charles Horn, a regulatory attorney at Morrison & Foerster in the District. “I don’t think it’s any accident that agencies have asked several hundred questions in their request for comments, that indicates they are struggling with how to implement these prohibitions.”

Consumer protection

Though the Consumer Financial Protection Bureau opened for business this summer, the agency still is awaiting the confirmation of its would-be director, Richard Cordray. That means the bureau, designed to shield consumers from abusive financial practices, is unable to operate at full capacity.

“The 2012 election adds a new dynamic to regulatory reform that may slow down some of the more controversial elements, like the CFPB,” said Gabriel Rosenberg, an associate in Davis Polk’s Financial Institutions Group.

The agency can still oversee existing bank regulations. It will not examine banks with under $10 billion in assets, but smaller institutions will still be subject to bureau rules.

As it stands, the agency cannot issue new rules addressing institutions such as mortgage services, payday lenders and private student loan providers that are often accused of predatory behavior.

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