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U.S. regulators are facing a series of difficult choices as they weigh how to finalize Basel III capital and liquidity rules next year, including how closely they adhere to an international agreement or whether they make changes for smaller institutions.
December 27 -
After spending nearly a year deliberating on an approach, the Federal Reserve Board on Friday released a proposal that will overhaul the way regulators will supervise foreign banks that operate in the United States, a significant shift from its longstanding case-by-case method.
December 14 -
Federal Reserve Board Chairman Ben Bernanke said Wednesday that regulators are nearing completion of a contentious rule that will ban proprietary trading at U.S. firms.
December 12 -
If proposed mortgage rules are too rigid, banks will have little choice but to restrict lending. But if they are ill-defined or too loose, banks say they face higher compliance costs and increased risk of litigation.
October 19
WASHINGTON — It has been a guessing game so far predicting details of the most vital post-crisis banking rules. But that could soon change.
Last year, federal regulators spent serious time deliberating and proposing rules, reading comment letters and negotiating specifics. But the rules are complex and often involve multiple regulators, so some of the meatiest items — everything from a new mortgage regime to a proprietary trading ban — were unresolved when the clock struck midnight Tuesday.
This year, though, the industry could see a torrent of final regulations, and not just those mandated by the Dodd-Frank Act. For bankers, frustrated by the uncertainty of what new rules might look like, that means finally getting some answers on what trades are allowed by the Volcker Rule, what actually qualifies as a "qualified mortgage" and what it means to be "systemically important."
Here is a rundown of major rules regulators are expected to finalize in 2013:
Proprietary Trading
Dodd-Frank gave the agencies until July 2012 to implement the Volcker Rule, which stops banks from doing their own trading and restricts their ties with hedge funds. With that deadline passed, the regulators — the Federal Deposit Insurance Corp., Federal Reserve Board, Office of the Comptroller of the Currency and Securities and Exchange Commission — are expected early in 2013 to finalize their earlier proposal.
The reform law still allows limited trading desks — to boost liquidity through certain "market-making" or "hedging" functions — and investment advisory services. But defining exactly which activities are exempted from the ban — named for former Fed Chairman Paul Volcker, who first proposed it — has been the biggest sticking point in getting agreement on a final rule.
Despite whatever flexibility the agencies allow, observers still see the rule as one of the most consequential pieces of Dodd-Frank. "It has tremendous potential effects for market liquidity, transaction spreads and also the availability of capital generally because of the limitations on the permissible securities dealing activity," said Ralph "Chip" MacDonald 3rd, a partner at Jones Day in Atlanta. "Other countries around the world that do not issue these types of rules may gain competitive advantages."
Mortgage Rules
As many as four mortgage rules likely to get finished this year — most of which were required by Dodd-Frank — have the potential to overhaul the market.
The most anticipated one involves new Consumer Financial Protection Bureau underwriting requirements to verify a borrower's "ability to repay." Most notably, the rule will define a "Qualified Mortgage," a new category of ultra-safe loan essentially exempted from the ability-to-repay rules that many expect will dominate the mortgage sphere. The QM rule is seen as linked to another big Dodd-Frank provision requiring lenders to keep 5% of the credit risk on loans they securitize and sell. The risk-retention rule, which multiple agencies are expected to finish after the CFPB completes its QM rule, will include its own definition of ultra-safe mortgage — known as a "Qualified Residential Mortgage", or QRM — that can skirt the retention requirement.
"In combination, they could make lending a minefield of consumer litigation," said Laurence Platt, a partner at K&L Gates. "If you make a loan that falls outside of QM or QRM, there is both a credit risk of loss, assignee liability and substantial monetary risk."
Meanwhile, the CFPB, which spent much of 2012 churning out new policies, is also expected to finalize a more simplified set of mortgage disclosures and sign off on new standards for servicers after an origination, including the structure of periodic billing statements, restrictions on force-placed insurance and steps for responding to borrower complaints. (The CFPB has signaled it will finalize several key mortgage requirements as early as this month.)
Off all rules expected to be finalized in 2013, the mortgage "regulations have the greatest ability to have an economic impact on the industry," said Thomas Vartanian, a partner at Dechert LLP. "Several agencies are reconstructing the origination, servicing and securitization business all in one fell swoop."
Basel
Though nothing is a sure bet when it comes to U.S. implementation of Basel capital rules, industry representatives are still anticipating action by the federal regulators in 2013 to adopt Basel III, with some even expecting a rule to be finalized early in the year.
The biggest obstacle to the U.S. agencies implementing the international measures ensuring banks have strong capital and liquidity appears to be the impact Basel III regulations will have on community banks. Following the agencies' June 2012 proposal to adopt the accord, small institutions expressed strong fears over how it would affect them, prompting calls for the regulators to go back to the drawing board. In November,
Since then, some observers have speculated the regulators could issue a Basel rule just for large banks — to join other nations sooner rather than later — and address capital and liquidity requirements for smaller banks in a later rule.
"If the United States is going to stay on the same time as Europe, … then the federal agencies will want to try and get the capital rules finalized" during 2013, said Michael Krimminger, the former general counsel of the FDIC and now a partner at Cleary Gottlieb Steen & Hamilton LLP.
Nonetheless, whatever form the capital rules take is expected to have huge ramifications for the industry.
"The [regulation in 2013] with the biggest impact top-to-bottom will be the capital rules," Krimminger said.
SIFIs
The Fed is expected this year to finalize a laundry list of new regulatory requirements for domestic "systemically important financial institutions" — typically bank holding companies with over $50 billion in assets or certain nonbank firms that pose systemic financial risks.
The central bank proposed many of the prudential standards — which were required by Dodd-Frank — in December 2011. Some have already been finalized, such as requirements for both supervisor- and company-run stress tests. But the bulk of the new standards are expected to come this year, including additional capital and liquidity requirements outlined by Dodd-Frank; counterparty exposure restrictions; steps firms must take to improve their overall risk management programs; and debt-to-equity limits.
But U.S. SIFIs are not the only large firms anticipating new Fed requirements in 2013. Just last month, the central bank proposed a similar set of standards for large
Other To-Do Items
Regulators are also expected in 2013 to provide additional guidance on how the FDIC will operate its
Daniel Crowley, a partner at K&L Gates, said 2013 will be the year when "the core" of the new derivatives requirements is "finalized and implemented." Yet, he added, regulators may also revisit some regulations that were completed last year.
"Even for some rules that were finalized in 2012, the industry is going to continue to challenge them and seek carve-outs and other exemptive relief," he said. "Those issues will have to be addressed in 2013."
Meanwhile, the Financial Stability Oversight Council is also likely to designate
"We've already seen that the FSOC is beginning to focus on large insurance companies that were recipients of bailout funds," said Crowley.
