Banks Face Crunch Time for Regulatory Deadlines

WASHINGTON — For banks, the light at the end of the tunnel is beginning to look like the front of an oncoming train.

While regulators have slowly but surely been ticking off the regulations they need to implement as part of the Dodd-Frank Act, banks are now racing to comply with those rules soon to take effect.

A slew of new and complicated regulations are due to take effect at roughly the same period next year. A key component of the Basel III capital rules takes effect in January, followed by three important Dodd-Frank Act provisions by next summer. They include the Volcker Rule ban on proprietary trading and a requirement that swaps activities be moved into nonbank affiliates, both of which take effect in July 2015. The following month begins compliance with a new consolidated regime for mortgage disclosures.

Intensifying the demands on banks scrambling to meet the deadlines are other regulatory assignments they face on a continual basis. Those include yearly submissions of resolution blueprints known as "living wills." Regulators have already pressured the most complex banks to raise the quality of resolution planning in their July 2015 submissions. The year will also bring more work on banks' annual stress test obligations.

"It's a stressful period, there's no doubt about it," said Kevin Blakely, a senior advisor at Deloitte & Touche LLP.

Those deadlines leave out other rules that regulators have yet to finalize, which could be added to the mix of upcoming compliance requirements. For example, many experts expect regulators to sign off soon on a new minimum liquidity standard — known as the "liquidity coverage ratio" — that is tougher than Basel III liquidity requirements. In their November 2013 LCR proposal, the agencies laid out a three-phase implementation cycle, with the first road marker in January 2015.

The coming deadlines have sparked extensive engagement by the banks with outside consultants and have meant specialists in various regulatory categories have jumped from one institution to another as banks search for the talent necessary to comply.

"We do see banking firms stretched to find the resources to be able to handle what they have on their plate. You do see one company hiring people away from other companies. There is a lot of poaching going on," said Julie Williams, a managing director at Promontory Financial Group and former chief counsel of the Office of the Comptroller of the Currency. "There just aren't enough people with the level of training and expertise that would be desirable to go around."

Blakely said the demand for talent in the regulatory sphere is almost unprecedented.

"The poaching is unbelievable," he said. "You're not being afforded the luxury of time to train people. There is an enormous increase in levels of compensation being demanded and being met by financial institutions. The consulting firms need people. The banks need people. The regulators need people. The law firms need this expertise. Everybody is poaching from everybody.

"If you know anything about Basel III or stress testing, if you have quantitative capability or modeling experience, all of those things are in enormous demand right now. It's just amazing."

The compliance triggers next year start with a bang on Jan. 1. That is when the U.S. version of the Basel III capital rules take effect for banks using the so-called "standardized approach" of the international capital regime.

Banks that choose to comply under the more complicated "advanced approaches" of Basel III — which are typically larger institutions — had to be in compliance by the start of this year. But their work is not done either. By January, the "advanced approaches" banks must abide by certain capital floors required under the "standardized approach." Additional capital buffers kick in by January 2016.

But the deadlines will really heat up next summer. Banks must essentially be in full compliance with the proprietary trading ban, first proposed by former Federal Reserve Board Chairman Paul Volcker, on July 21, 2015. Institutions with more than $50 billion in assets must incorporate an "enhanced" compliance program by that date, whereas smaller institutions can start with a "standard" program that becomes "enhanced" in 2016.

Just as the largest banks are racing to meet the Volcker Rule deadline, they will also have to ensure compliance with the so-called swaps "push-out" rule. The derivatives rule, required under Dodd-Frank, forces banks with active derivatives-trading units to move certain swaps activities out of their depository institutions and into entities that lack federal support. Compliance with the rule was originally required in 2013, but banks were granted a two-year transition period.

Meanwhile, in August of next year, the mortgage industry must convert to a new disclosure framework that merges forms governed by the Truth in Lending Act with those governed by the Real Estate Settlement Procedures Act.

Observers said dealing with multiple big compliance projects at once is requiring a large amount of resources and coordination.

"The world at large sees the Volcker Rule" and other distinct requirements, "but it doesn't see the balance of the compliance burden to each institution," said Thomas Vartanian, a partner at Dechert LLP. "It's overwhelming."

And many experts say that balance is not limited to momentary deadlines. The industry is still acclimating to key rules already effective under Dodd-Frank, and larger banks face annual requirements to be assessed under Federal Reserve Board stress tests, to conduct their own stress tests and to update their living wills.

"These deadlines are important and they'll have to meet them… but the compliance world has a lot more that it has to deal with than just" the deadlines, said Pamela Martin, a managing director for KPMG's Regulatory Center of Excellence.

The 11 banks considered most complex by the Fed and Federal Deposit Insurance Corp. — that are under an expedited schedule for submitting resolution plan updates — will face added scrutiny in July 2015 when their next round of wills are due. In issuing blunt criticism of the banks' 2013 plans, the two agencies recently set the bar considerably higher for next year's drafts, warning banks they could face regulatory consequences established by Dodd-Frank if their 2015 plans are "not credible."

Martin said the resolution plans, which require banks to report on their legal entity structures, are an example of where a lot of the compliance projects involve banks needing to improve their data gathering and reporting capabilities.

"The... quality of data that the institutions are using for risk management decisions internally but also to supply the information that's needed to meet many of these [regulatory] guidelines, and the infrastructure supporting that, has been historically weak because of all the mergers," she said.

Blakely said he is optimistic that institutions will hit the compliance targets and continue to adapt to the changing regulatory environment. However, for mandates that require updating information annually such as living wills, he said, it may take a few iterations before banks get it completely right.

"Somehow or another the industry has managed to make it this far and I don't have any doubt that the industry will continue to meet the expectations even if it takes a couple of rounds to do so," he said.