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Introduction | Spotlight: New Regulatory Capital Framework | Spotlight: The Dodd-Frank Act: Third Anniversary Implementation Status | State of the District | National Banking Trends

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
Dodd-Frank mandated several structural changes to the supervisory framework for financial institutions to cover systemically important nonbank financial companies, provide more protection to consumers, and rationalize supervision. These changes have been completed. The Financial Stability Oversight Council (FSOC) and the Consumer Financial Protection Bureau (CFPB) are open for business, and the federal banking regulators have assumed responsibility for the supervision and regulation of savings and loan holding companies.

Limiting systemic risk
A key goal of Dodd-Frank was to ensure the financial stability of the U.S. economy. The FSOC is responsible for providing an annual report to Congress on its assessment of threats to financial stability and is charged with working with the federal financial regulators to address any threats. This responsibility includes the designation of financial market utilities; nonbank systemically important financial institutions; and systemically important payment, settlement and clearing activities.

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
The Act requires the Federal Reserve Board to establish enhanced prudential standards for bank and nonbank systemically important financial institutions. (Bank holding companies with $50 billion or more in total consolidated assets are defined as systemically important by Dodd-Frank.) The enhanced standards for capital and leverage, prompt corrective action, stress testing, and resolution planning have been approved and are being implemented for banking organizations.

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.

Resolution planning
A key component of Dodd-Frank's efforts to end the too-big-to-fail dilemma requires systemically important financial institutions to file resolution plans (also known as "living wills") detailing strategies for a rapid and orderly resolution in bankruptcy. The complexity and scope of the plan depends on the extent of a firm's non-banking presence in the United States. The Board and the Federal Deposit Insurance Corporation's resolution requirements were finalized in 2011 and are being implemented in three stages based on the amount of nonbank assets held by firms. Plans for the largest firms were submitted for the first time on July 1, 2012. Initial plans for the second group of firms were submitted on July 1, 2013. The remaining firms will submit their first plans on December 31, 2013. The Federal Reserve and the FDIC recently released a template for smaller firms to follow when filing their resolution plans. The Federal Reserve and FDIC are responsible for reviewing the plans and providing feedback to institutions.

Consumer Financial Protection Bureau
Dodd-Frank mandated the creation of a new regulator, the CFPB. The CFPB assumed responsibility for regulating consumer financial transactions, including rule writing and examination authority for banking institutions with $10 billion or more in assets. The CFPB also supervises nonbank consumer financial service providers.

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
Additional prudential standards for systemically important financial institutions are required, including liquidity standards, single-counterparty credit limits, risk management, and a debt-to-equity limit for companies that pose a grave threat to financial stability. The Board of Governors has issued separate proposals for these standards for U.S.-domiciled bank holding companies and foreign banking organizations with a significant U.S. presence. The comment periods have ended, and the Board is considering the feedback received.

The Volcker rule
The Federal Reserve continues to deliberate on how to best implement the Volcker rule in a way that enhances financial stability, avoids unintended consequences, and addresses operational challenges.

Incentive compensation
The Board of Governors and the other federal financial regulators released a proposal for comment on standards governing incentive compensation in March 2011. The regulators continue to consider ways to implement such standards.

Recent notices of proposed rulemaking
Several requests for comment were released recently, including: proposals for a supplemental leverage ratio for banking organizations with $700 billion or more in consolidated total assets or $10 trillion in assets under custody, additional stress testing guidance for bank holding companies with total assets between $10 billion and $50 billion, and a revised risk retention rule for asset-backed securities.

Conclusion
At times, Dodd-Frank implementation has seemed to take "one step forward and two steps back," most recently when the Federal Reserve's rule implementing the Durbin Amendment was overturned by the U.S. District Court. However, regulators have taken significant steps to address the requirements of Dodd-Frank, and progress is continuing. The structural changes in the supervision framework have been completed. The first financial market utilities and systemically important nonbank financial institutions have been designated.

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.