2011: The Year of Standing Still

WASHINGTON — Ever had a dream where you think you are moving forward only to realize that after running a mile, you are exactly where you started from?

Yeah, 2011 was pretty much like that.

With the passage of the Dodd-Frank Act in 2010, regulators were supposed to spend the year implementing the massive regulatory reform legislation.

Instead, by the end of the year, we appear to be pretty much exactly where we were at the beginning. Of the 400 or so new rules required by the legislation, less than one-quarter have been finalized. Big ticket items like risk retention and the Volcker Rule have been proposed, but garnered so much criticism it seems unlikely they will be finished anytime soon.

Many of the same fights from 2010, meanwhile, continued to dominate 2011. Most notably, the creation of the Consumer Financial Protection Bureau has proven to be one of the biggest flashpoints of the law.

Although the CFPB officially opened its doors on July 21, the Republicans and Democrats were still sparring at yearend about whether it should have a leader. Before they will even consider a nominee for the agency's director, 44 Republicans are demanding the administration help pass a law overhauling the CFPB's structure. They want three things: to replace the director with a commission, put the agency on the appropriations process, and give bank regulators more power to overrule the CFPB.

Democrats accuse the GOP, meanwhile, of abusing the confirmation process to refight a battle they lost in 2010. While President Obama's pick for CFPB director, former Ohio attorney general Richard Cordray, hangs in limbo, both sides are more interested in a war of words.

Obama took the unusual step of holding a press conference after the Senate GOP blocked a vote Dec. 8 on Cordray's nominations, painting the Republicans as obstructionists and anti-consumer protection.

Sen. Lindsey Graham, R-S.C. escalated the rhetoric by saying in an interview with NBC News that the CFPB was like "something out of the Stalinist era, simultaneously entering the Hall of Fame for egregious political hyperbole.

The stand-off is certain to continue into 2012. Although liberal groups are calling on Obama to put Cordray into the CFPB through a recess appointment, the House GOP are expected to prevent the Senate from technically taking a recess. While some argue Obama could do so anyway, he's unlikely to do so for this simple reason: there is much to be gained in continuing the battle.

Making a recess appointment would only further inflame the Republicans, who may then refuse to confirm any nominees, and would likely be challenged in court. Continuing the war of words, however, allows Democrats to continually raise an issue that portrays their political rivals as too tied to Wall Street.

Aside from the CFPB, the next biggest battle of the year was definitely over the Durbin amendment. Banks were apoplectic when Sen. Richard Durbin, D-Ill., successfully convinced Congress to add a provision to Dodd-Frank capping interchange fees on debit cards. But with so many issues distracting them, they were unable to put up much of a fight.

That changed in 2011, when the Durbin measure became banks' top priority. Several large banks raised the stakes by declaring that they would end popular debit card reward programs if Durbin was not delayed or scrapped altogether. Bankers also rallied around a bill from Sen. Jon Tester, D-Mont., which would delay implementation of the Durbin provision.

Community bankers, who technically were exempt from the interchange limit, joined the fray, arguing they would still be affected when the fee cap went into effect for large banks. They were supported by Federal Reserve Board Chairman Ben Bernanke, who told Congress the provision may cause some small banks to fail.

But bankers had more than met their match against the retailers, who vigorously set out to defend their victory. Ultimately, banks were able to gain traction, even persuading several lawmakers to switch votes from supporting Durbin in 2010 to voting for a delay — but it wasn't enough. In June, the Tester bill won 54 votes in the Senate, six shy of the 60 necessary to overcome a filibuster threat.

The Fed followed up that month by finalizing the Durbin rule. Although it raised a proposed cap from 12 cents to 21 cents, while allowing some extra room to take into account fraud prevention, bankers remain furious about the rule. Retailers are no happier. Arguing the Fed went too far in lifting the proposed cap, they filed suit against the central bank, arguing it had essentially gone rogue.

The largest mortgage servicers spent most of their year discussing a potential deal with the state attorneys general to resolve problems with the foreclosure process, including charges of robo-signing.

But the situation started to fall apart in March after American Banker published a draft deal under which the banks would agree to principal reductions. The banks, Republican lawmakers and even other state AGs objected to such terms, arguing they went too far.

Negotiations dragged on through September, only to have the New York and California AGs pull out of talks.

Since then, Iowa Attorney General Tom Miller has continued to insist a deal can happen, with a flurry of news reports suggesting one is imminent. But sources said the two sides are still far apart. While an eventual deal is likely, it's uncertain how far it will go, how much money will be involved and exactly which states will sign off.

This year also saw the release of several major proposals, including plans to implement the Volcker Rule — a ban on banks' proprietary trading — and a proposal to force large institutions to deliver "living wills" detailing how they could be taken apart.

Bankers were particularly focused on the risk-retention proposal, which details how regulators plan to require lenders to retain 5% of the risk of loans they securitize. Most focused on the exception to the proposal — called "qualifying residential mortgages" — which regulators said must include a 20% down payment and comply with certain debt-to-income requirements.

After regulators released the plan (http://www.americanbanker.com) in March, the industry swiftly condemned the QRM criteria as too narrow, and enlisted lawmakers from both parties to press for regulators to loosen the standard. With the departure of Federal Deposit Insurance Corp. Chairman Sheila Bair in July, most observers think regulators will give in to such demands. Some have even suggested the entire plan will be re-proposed, given other technical issues the industry has objected to.

The situation with Volcker is no clearer. Drafts of the plan leaked periodically during the summer, before American Banker offered the entire proposal a week early in October. Industry immediately said the plan was too complicated, and even regulators seemed uncertain exactly how to implement the plan, asking hundreds of questions about their own proposal.

Finally, 2011 was also a year in which Basel went global. Bankers have talked for decades about the international capital standards, but they've never won much attention outside of American Banker and a few other media outlets. But a June proposal to charge systemically important firms 1% to 2.5% of additional common equity sparked plenty of public debate. Jamie Dimon, the chief executive of JPMorgan Chase & Co., was the most vocal, declaring the surcharge "anti-American" in an interview with Financial Times. Dimon suggested the U.S. should withdraw from the accord.

Dimon and others said the surcharge — added on top of a 7% common equity requirement — would inhibit economic growth. Many lawmakers agree.

But at the most recent Group of 20 meeting this fall, international regulators staunchly defended the surcharge as necessary, arguing it will make the system safer without compromising the world economy.

Though the issue is ostensibly settled, if there's one thing that 2011 taught us it's that no fight is ever really over.