The Dodd-Frank Act: Third Anniversary Implementation Status
On July 21, 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act to remedy weaknesses in the supervision and regulation of the financial industry that were revealed in the financial crisis. The wide-ranging and complex act provides for the oversight of systemically important nonbanks, requires new and enhanced supervision, and seeks to eliminate the perception that some firms are "too big to fail."
As we all know, three years after enactment, Dodd-Frank implementation is still a work in progress. In some cases, comment periods have been extended or reopened, multiple proposals have been issued, and deadlines have passed, all to facilitate deliberative policymaking. Policy makers seek to avoid unintended consequences for consumers, the industry, and the economy that could result from rulemaking. Despite the delays, progress has been made and regulators are cautiously optimistic that additional rules will be finalized by year-end 2013.
The most significant developments that have taken place since the second anniversary of Dodd-Frank in July 2012 are the designation of the first systemically important nonbank financial institutions, the adoptions of the new Regulatory Capital Framework and Dodd-Frank stress-testing rules, and the Consumer Financial Protection Bureau's action on mortgage reform. Additional details on these developments are included below.
Implementation Status: Final Rules
Structural changes to the supervision framework
Limiting systemic risk
In July 2012, eight firms were designated as financial market utilities, and the Federal Reserve approved a final rule establishing risk-management standards for those firms. (The designated financial market utilities are The Clearing House Payments Company L.L.C., CLS Bank International, Chicago Mercantile Exchange, Inc., The Depository Trust Company, Fixed Income Clearing Corporation, ICE Clear Credit LLC, National Securities Clearing Corporation, and the Options Clearing Corporation.)
In July 2013, the FSOC designated the first nonbank systemically important financial institutions: American International Group Inc. and General Electric Capital Corporation Inc. On September 20, the FSOC announced the designation of a third systemically important institution, Prudential Financial Inc.
In addition to the designations, the FSOC has published proposals to reduce the systemic risk posed by money market funds. It continues to work with the Securities and Exchange Commission to address these concerns.
Establishing enhanced prudential standards
Capital and leverage requirements: The enhanced capital and leverage standards are made up of two rules. The first rule was implemented in 2011, when the Board of Governors adopted a capital planning requirement for systemically important bank holding companies. The rule requires institutions to make a forward-looking assessment of their capital position under different scenarios to insure that they have enough capital to continue operating and serve as financial intermediaries in times of severe stress.
The second rule, which improves the quality and quantity of capital, was adopted in July 2013. It implements Basel III in the United States and addresses certain requirements of Dodd-Frank. The rule is effective in January 2014 for the largest, most complex bank holding companies and in January 2015 for smaller firms. The Board's prompt corrective action policy has been adjusted for the new requirements. For more information on the changes to capital and leverage requirements, see this quarter's Spotlight article on the new regulatory capital framework.
Stress-testing requirements: Dodd-Frank requires stress testing for bank holding companies, banks, and savings and loan holding companies with assets of $10 billion or more. In October 2012, the Board adopted two stress testing rules: one for companies with $50 billion or more in total assets and another for firms with greater than $10 billion and less than $50 billion in assets. The first round of Dodd-Frank stress testing of the firms included in the Comprehensive Capital Analysis and Review (CCAR) was conducted in 2012. The second round of stress testing, including all firms with $10 billion or more in total consolidated assets, begins in October 2013. Requirements are scaled based on the size and complexity of firms. Firms with more than $10 billion and less than $50 billion in total assets are not subject to supervisory tests; however, these institutions must conduct internal tests using scenarios provided by the Board of Governors.
Consumer Financial Protection Bureau
Among the new CFPB's most pressing tasks is the implementation of the mortgage reform and anti-predatory lending provisions of Dodd-Frank. In January 2013, the bureau released guidance on two components of the Dodd-Frank mortgage reforms: the ability to repay and qualified mortgage standards, which will take effect in January 2014. This action clears the way for financial regulators to continue implementing other mortgage-related proposals, including the risk retention rule for asset-backed securities.
Implementation Status: Pending Rules
The federal financial regulators, including the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Consumer Financial Protection Bureau continue to work on Dodd-Frank implementation and anticipate finalizing additional rules before year-end 2013.
Remaining enhanced prudential standards
The Volcker rule
Recent notices of proposed rulemaking
Final rules regarding key components of the enhanced prudential standards required by Dodd-Frank are being implemented, including: the capital plans rule, a new regulatory capital framework with revisions to prompt corrective action requirements, Dodd-Frank stress testing, and resolution planning. The CFPB is implementing the mortgage reform and anti-predatory lending provisions of Dodd-Frank and is working to address other consumer issues.Final rules are pending on proposals to implement additional enhanced prudential standards for large domestic bank holding companies and foreign banking organizations, the Volcker rule, and incentive compensation.
Recently, supervisors have requested comments on proposals for supplemental leverage requirements for the largest banking organizations, stress-testing guidance for medium-sized companies, and risk retention rules for asset backed securities. Officials are hopeful that additional provisions will be enacted by year-end 2013.
This article was written by Madeline Marsden, a senior financial analyst in the Risk Analysis Unit of the Atlanta Fed's Supervision and Regulation Division.