As previously discussed, a central item in the new regulatory reform bill is the creation of the Financial Stability Oversight Council to oversee systemically significant financial firms. To assist the council, the bill also creates a new office within the Department of the Treasury known as the Office of Financial Research. The primary purpose of the Office of Financial Research will be to collect and analyze data for the council’s use in its functions.
While the functions of the Office of Financial Research will certainly lead to enhanced reporting requirements for bank holding companies with $50 billion or more in consolidated assets (as well as the added burden of contributing to the funding of the office), it is reasonable to expect that the office will need additional data from the financial industry as a whole in order to provide context in its analysis of data collected from large financial firms. For that reason, the conference text of the regulatory reform bill allows the office, after consultation with its director and the Financial Stability Oversight Council, to require the submission of periodic or other data from any financial company (which would include banks and bank holding companies of any size) in order to assess “the extent to which a financial activity or financial market in which the financial company participates…poses a threat to the financial stability of the United States.”
The information the Office of Financial Research will deem important in providing analysis to the council and from which financial companies the office will seek the information remain to be seen. Certain provisions of the bill are designed to minimize duplication in reporting, and, as such, one would hope the additional reporting will be limited to modifications of existing reporting forms. It is clear, however, that its reach extends beyond the large firms that could pose systemic risk to the financial industry.
The House and Senate conferees approved the financial regulatory reform conference report (otherwise known as the Dodd-Frank Wall Street Reform and Consumer Protection Act) late last week, and the House and Senate are now poised to vote on the legislation. As expected, the final version of the bill incorporates a provision requiring the Federal Reserve Board to write restrictions on the ability of card issuers to set interchange fees (see Section 1075 et seq., starting on page 308 of the PDF version of the conference report).
However, the interchange provision was substantially modified from its original form. Thanks to the successful lobbying efforts on the part of state governments, the prepaid industry and advocates for the unbanked community, prepaid cards used to disburse government benefits as well as reloadable prepaid cards are exempt from the interchange limits. It should be noted that such cards are exempt provided that they do not charge any overdraft fees and provide one fee-free withdrawal from the issuer’s ATM network per month.
The various lobbying efforts in support of striking the entire interchange provision from the bill proved less successful and ultimately failed. And while small issuers (i.e., issuers, together with it affiliates, having assets of less than $10 billion) are exempt from the interchange provisions, many have argued that the exemption is meaningless since small institutions will be forced to cut their interchange fees to compete with large banks.
On June 29, 2010, Sarah Wallace, chair of the board of directors of First Federal Savings and Loan Association in Newark, Ohio, authored a passionate opinion piece in the Wall Street Journal titled “The End of Community Banking.” While I agree with many of Ms. Wallace’s points, I do NOT see the end of community banking in the foreseeable future.
I do think that we are going to see tighter regulations and tighter credit than we saw in the five years before the financial meltdown – 2002 through 2007. Those five years were the culmination of a world wide expansion of credit and leverage that began in the US around 1980, so we really had a great run. Nonetheless, by 2002, a good number of observers would argue that credit availability was running somewhat out of control.
As Mrs. Wallace suggests, we will have tighter rules, but they will by nowhere near as tight as those that prevailed until the late 1980′s or early 1990′s. During my career beginning in the late 1960′s, we have done away with limits on interest paid on deposits, most commercial usury limits, limits on branching and cross state expansion, certain caps on real estate lending, and we have expanded the lending limit in many cases from 10% of capital to 25%. Most of these changes will not be reversed, and credit will continue to be available for borrowers who can demonstrate an ability to repay the loan. However, I do not see banks going to the credit excesses of the 2002-2007 period, and there will be people who might have gotten loans then who will not be able to get loans in 2011… and that is probably not all bad.
A key political hot button throughout the regulatory reform debate has been the treatment of firms that are viewed as posing systemic risk to the United States financial services industry. The government assistance provided to some larger firms was a polarizing item to the American public, and there was widespread call for increased oversight of these institutions.
Out of the debate grew the Financial Stability Oversight Council, which is the central body of the conference text of the Financial Stability Act of 2010, a part of the regulatory reform bill. This council, which will be composed of high ranking officials from various governmental and regulatory authorities, including the Federal Reserve, the OCC, the FDIC, the SEC, and the new Consumer Financial Protection Bureau, will serve as the “new sheriff in town” with respect to large financial institutions (with consolidated assets of $50 billion or more) and other large nonbank financial companies that the council deems necessary to place under regulatory oversight. The Secretary of the Treasury will serve as Chairperson of the council.
Among the purposes delineated for the council is “to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such [regulated] companies that the Government will shield them from losses in the event of failure.” The primary tool to be used by the council in achieving this purpose is placing certain large firms under Federal Reserve supervision.
The Federal Reserve will develop prudential standards to help mitigate the risks presented by these large firms. The council will make recommendations to the Federal Reserve with respect to the prudential standards. These recommendations may relate to risk-based capital, leverage, and liquidity, among other things. In addition, with approval of the council, the Federal Reserve may limit a firm’s ability to expand through mergers and acquisitions, restrict its ability to offer certain products and services, require termination of one or more financial activities or impose conditions on such activities, and, if deemed necessary, require spin-offs of assets or off-balance sheet items held by a firm.
The unexpected death of Senator Robert C. Byrd (D-WV) could push final passage of the conference report in the Senate until after next week’s scheduled district work period. Even before Byrd’s death, Democrats appeared short of the 60 votes needed to take up the conference report. Senator Scott Brown (R-MA), one of four Republicans who supported the Senate version of the bill when it was passed 59-39, voiced opposition to the final version citing concerns about the addition of a tax on banks. The three other GOP supporters of the Senate-passed bill were Charles Grassley (R-IA), Olympia Snowe (R-ME), and Susan Collins (R-ME). The Senate is expected to take up the conference report immediately after passage by the House, which remains on track to debate the conference report Tuesday or Wednesday.
Senator Byrd’s seat will remain open until the Governor of West Virginia appoints a temporary representative to serve the balance of Senator Byrd’s term. In this case, we believe the Governor he will appoint a replacement who will not seek reelection. We will keep you posted as we learn more about the bill’s prospects as the July 4th district work period approaches.
After the dust settled on the work of the financial reform bill’s conference committee, Section 171 — the capital treatment provisions added by Senator Susan Collins (R-Maine) — grandfathers securities previously issued by small and mid-size bank and thrift holding companies and otherwise phases in the heightened standards. In addition, the Federal Reserve’s small bank holding company policy statement (applicable to holding companies with less than $500 million in consolidated assets) is preserved. Accordingly, the Dodd Frank Act will not impact small bank holding companies so long as they remain under $500 million in consolidated assets. Other provisions of the Act regulate systemic risk and direct the Fed to establish counter-cyclical capital requirements and to force holding companies to act as a “source of strength” for subsidiary banks.
The amended Section 171 avoids placing significant and untimely capital needs on community banks. Although we do not expect further debate on this or any other provision of the Dodd Frank Act, the reconciled bill still needs to pass both houses of Congress and be signed by the President in order to become law.
The conference report does not modify the basic policy change proposed by Senator Collins — to subject holding companies to capital requirements at least as stringent as those applicable to banks. As we have discussed, this shift would exclude trust preferred securities and TARP CPP Preferred Stock from holding company tier 1 capital totals. The impact of this change cannot be understated since banks are already struggling to retire trust preferred obligations and to generally raise capital. However, the conference committee has significantly softened the impact via grandfather provisions, blanket exemptions and transition periods.
Update as of 2011.
The U.S. Government Printing Office has published an 849 page PDF of the final text of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which represents the official version adopted into public law. While large, this version allows for easy full-text searching and easy searching for any particular section. (Due to its size, you may need to right-click on the link and save a local version of the PDF before opening.)
The International Association of Risk and Compliance Professionals has also published a website with the complete Dodd-Frank Act in smaller chunks if you’re focused on a particular section.
The Library of Congress also provides the version passed by Congress in both PDF and text (see the links next to #6).
Financial Regulatory Reform Bill
On Friday, at 5:40 a.m. EST, the House and Senate conferees approved the conference report of the over 2,000-page financial regulatory reform bill, thus ending two weeks of negotiations and a 20 hour marathon final session. Below is a summary of major issues addressed in the legislation. Note, however, that the final conference report language is not yet available. Accordingly, this list should not be considered exhaustive.
Consumer Financial Protection Bureau: The bill creates a newly housed Bureau under the Federal Reserve with authority to regulate all consumer financial products sold by banks and other institutions. Banks with less than $10 billion in assets are subject to CFPB rules, but prudential regulators will cover such banks’ examination and enforcement.
Deposit insurance: The bill changes the assessment base to “assets minus tangible capital.” It also permanently increases deposit insurance coverage to $250,000, retroactive to Jan. 1, 2008, and it extends the Transaction Guarantee Program through 2012.
Bank Tax: The bill’s spending is offset by revenue generated by authorizing a special assessment on financial institutions with more than $50 billion in assets, and hedge funds with more than $10 billion in assets. The FDIC will be charged with collecting the fees, which could total up to $19 billion over the next five years.
On June 22, 2010, the FDIC Board of Directors adopted a final rule extending the Transaction Account Guarantee (TAG) component of the Temporary Liquidity Guarantee Program (TLGP) through December 31, 2010, for insured depository institutions (IDIs) currently participating in the program. The TAG program guarantees all funds held at participating IDIs in qualifying noninterest-bearing transaction accounts beyond the recently increased $250,000 deposit insurance limit. This final rule preserves the interim rule’s assessment fee structure and 25 basis-point interest rate limit for NOW accounts guaranteed by the program.
The final rule also provides that, without additional rulemaking, the Board may further extend the program for a period not more than a year (until and including December 31, 2011) if it finds that economic conditions and circumstances that led to the establishment of the program are likely to continue beyond December 31, 2010, and that extending the program for an additional period of time will help mitigate or resolve those conditions and circumstances. The FDIC must publish notice of any such further extension by October 29, 2010. This further extension language is the minor and only departure from the interim TAG rule issued on April 13, 2010. The interim rule provided that the FDIC could extend the program on the same grounds and without additional rulemaking “for an additional year.”
Financial Regulatory Reform Bill
The House and Senate conference committee on the Wall Street Reform Act met formally for the first votes on Tuesday and concluded for the week on Thursday. On Tuesday, conferees agreed to increase permanently the deposit insurance limit to $250,000 and retroactively cover the period between Jan. 1, 2008 and October 3, 2008, when the limit was first temporarily raised to $250,000. The retroactive change means that depositors with between $100,000 and $250,000 affected by 16 bank failures during the time frame will be entitled to some recovery. The conferees also agreed to eliminate the 1.50% hard cap on the Deposit Insurance Fund and give the FDIC full discretion to decide whether to rebate any excess over that amount. The provision also eliminates the automatic “brake” on the growth of the fund which required partial dividends after the reserve ratio exceeded 1.35 percent. However, conferees could not come to agreement on the Transaction Account Guarantee program. The House conferees proposed making the program permanent for all banks, while the Senate’s representatives would agree only to a two-year extension beyond the current Dec. 31, 2010 expiration date. House Financial Services Committee Chairman Barney Frank (D-MA) said the House would consult with the Congressional Budget Office to determine if making the program permanent would generate significant government cost savings. The conferees also agreed to grandfather mutual holding companies’ dividend waiver policies in place as of Dec. 1, 2009. Senate conferees, however rejected a House offer to establish a mutual national bank charter.
On Wednesday, the conference committee voted to permanently exempt companies with less than $75 million in market capitalization from compliance with the Sarbanes-Oxley Act’s Section 404(b) auditor attestation requirements. Conferees also agreed to remove Rep. Maxine Waters’ (D-CA) provision that would have enhanced investors’ ability to bring lawsuits against those who knowingly or unknowingly provided “substantial assistance” to primary violators in securities fraud.