Deluge of New Bank Rules Incoming After Quiet Summer

WASHINGTON — Break's over.

Although the last few months have seen a dearth of major rulemakings from the agencies, this summer may end up being remembered as the calm before the storm.

With just three and a half months left until 2013, regulators are under pressure to release a boatload of new regulations, including some of the most contentious items on their plate. That includes the Volcker ban on proprietary trading, significant mortgage regulations and a regime for identifying systemically important financial institutions.

While there is no guarantee that those items will be released before Jan. 1, observers said it is clear regulatory activity is going to accelerate in the next few months.

"There has been a general lull that will quickly change tides on the regulatory and rulemaking front, especially come the middle of and late October," said Isaac Boltansky, an analyst with Compass Point Research and Trading. "That is largely due to comment periods ending as well as a renewed sense of importance given the post-election setting."

Below is a rundown of policies yet to be completed and some prognostications about any progress in the fourth quarter:

Volcker Rule
The Volcker Rule — a provision designed to stop banks from engaging in proprietary trading — is already late. It was supposed to become effective two months ago, and instead it has yet to be finalized.

Worse, the proposal has prompted more questions than answers — literally — since regulators attached dozens of detailed inquiries to their plan, which was released by several agencies last November. With more than 18,000 public comments filed, many observers have argued the agencies must start over.

So far, however, regulators have indicated they will try to push ahead with a final rule before 2013.

Following a speech last week at American Banker's Regulatory Symposium, Martin Gruenberg, the acting FDIC chairman, said regulators are "working" toward a goal of completing the rule by yearend.

"That's the intention — to try to get it done," Gruenberg told reporters. "We will see."

The problem, Boltansky said, is the sheer number of regulators that must agree to it and whether they can do so before yearend.

"On the Volcker Rule, in my mind there continue to be too many cooks in the kitchen, and they are still too far apart," Boltansky said. "I think we're going to have another round of proposed rulemakings, and there is a chance of divergence between the prudential bank regulators on the one hand, and the SEC and the CFTC on the other hand."

The biggest issue remains how regulators choose to craft exemptions from the proprietary trading ban. Under Dodd-Frank, regulators must allow certain "hedging" and "market-making" activities—but it has proven difficult to define those terms and the exact scope of the exceptions.

QM and Other Mortgage Rules
One of the most anxiously awaited rules is a regulation by the Consumer Financial Protection Bureau that would require lenders to verify a borrower's ability to repay unless a loan is a so-called "qualified mortgage." Dodd-Frank requires the CFPB to finalize the rule by Jan. 21, when the provision is supposed to take effect under the financial reform law.

Lenders and consumer advocates have battled over the scope of the definition of a qualified mortgage, and the degree to which lenders should be protected from liability when they make such a loan. The Federal Reserve Board issued the original qualified mortgage proposal in May 2011 but although the authority for implementing the regulations transferred to CFPB last year, the bureau still has not issued a final rule.

After months of signaling that the rule would be out by the end of June, the CFPB announced May 31 that it was seeking additional comments, and pushed back its ETA to the end of the year. At the time, observers said the delay illustrated the difficulty the agency was having interpreting and implementing the statutory language in Dodd-Frank.

The delay will almost certainly mean a longer wait for its sister regulation, the risk retention rule, which includes a class of high quality loans known as "qualified residential mortgages." Because QRM is supposed to be more broadly defined than QM, observers expect that regulators will continue to wait for the CFPB to finish its rule before they move ahead.

The CFPB must also finalize a proposal issued last month that would require mortgage servicers to provide clear monthly statements, earlier disclosures for interest rate adjustments and options to help borrowers avoid foreclosures and costly force-placed insurance.

The plan goes beyond many of the consumer protections provided in the $25 billion national mortgage servicing settlement signed earlier this year between the five largest servicers and federal regulators. Among other things, it would force servicers to immediately credit payments to customers' accounts and provide troubled borrowers with direct access to foreclosure prevention programs.

Like the QM rule, those regulations are also due to take effect on Jan. 21 — with or without final regulations. As a result, observers said the CFPB is going to move quickly to finalize them before that time.

"There's a lot of pressure on the bureau to get these regulations out, given the self-effecting Jan. 21 date," said Thomas Vartanian, a partner at Dechert LLP. If the agency were to miss the date, "the statute becomes effective, but there are no implementing regulations in place, which means that there can be ambiguity, lack of clarity and so on and so forth."

Sec. 165 and Basel III
The Fed is currently reviewing two sets of proposals that would establish a host of new industry standards.

Last December, the Fed proposed a wide-ranging package of prudential rules in compliance with sections 165 and 166 of the Dodd-Frank financial reform law. Among other things, the rules would set new capital and liquidity standards for the largest U.S. banks and certain non-bank financial institutions deemed systemically important. They would also set single-counterparty credit limits and finalize guidance for stress tests.

In June, the agency also issued a proposal to implement standards negotiated under the Basel III accord, including capital and liquidity requirements. It recently extended the comment period for that set of rules through Oct. 22.

But unlike the Volcker and QM rules, the Fed may not be able to finalize either Basel III or the Section 165 plans by the end of the year, observers said, citing their complexity. Community bankers, for one, have gone on the warpath against Basel III, arguing that the plan would cripple them by significantly changing the amount of capital they have to hold against certain assets.

"Frankly, I don't see a whole lot likely to come out this year unless regulators really feel that certain things are manageable and they feel like they have a good beat on how the standards would impact the industry," says Kevin Petrasic, a partner at law firm Paul Hastings.

To simplify the process, however, regulators could possibly finalize parts of the section 165 standards sequentially, rather than as one whole package.

"For the prudential standards, I would venture to guess that if there are parts that are ready to move forward, it may make sense to do that," Petrasic says, suggesting that a debt-to-equity ratio requirement for the largest banks, mandated under Dodd-Frank, could be one potential candidate.

But observers said Basel III will take significantly more time to work out.

"From everything I know, the agencies are going to need 18-wheelers to handle all the comments they're going to get," said Karen Shaw Petrou, managing partner at Federal Financial Analytics. "I would fall over in a dead faint if there was a final Basel rule" by year's end.

SIFIs
Many observers also expect the Financial Stability Oversight Council to make progress on new rules formally designating certain nonbanks as "systemically important financial institutions."

In July, the council named eight financial-market utilities as systemically important.

A Sept. 12 report by Bloomberg News, citing anonymous sources, said the council was planning to meet to formally seek confidential data from five other candidates for the designation.

Before the end of the year, "it's reasonable to believe the process will at least begin in earnest" on designating firms, said Coryann Stefansson, Managing Director at PricewaterhouseCoopers.

Derivatives
According to a Sept. 12 report by Davis Polk & Wardwell, among the approximately 90 derivatives rulemakings required under Dodd-Frank — mostly assigned to the Securities and Exchange Commission and the Commodity Futures Trading Commission — a little more than half have been finalized.

While the SEC has yet to propose many of its derivatives rules under the law, observers expect the CFTC to finalize a whole slew of its regulations in the fourth quarter. Those include rules dealing with position limits, margin requirements, capital rules for swaps dealers and guidance on cross-border swaps involving non-U.S. endusers and dealers.

"On the CFTC side, they appear to be near the goal line. Most of their required rulemakings will be done this year, with a little left over next year," said Byungkwon Lim, a partner at Debevoise & Plimpton LLP.