Five Ways That Dodd-Frank Has Shaped Banking
July 21, 2015 10:00 AM
Five years after the Dodd-Frank Act was signed into law by President Obama, it remains as controversial as when it was enacted. While partisans may debate whether the changes are good or bad, there is no doubt they've had a sizable impact. Following are the biggest ways the system has changed.
The Creation and Oversight of the CFPB
Love it or hate it, the creation of the Consumer Financial Protection Bureau has altered the face of banking. The consumer agency directly examines banks with more than $10 billion of assets and has finalized rules governing mortgage underwriting, disclosures and overdraft. Under Director Richard Cordray, it has taken enforcement actions related to mortgage servicing and now publicly releases the complaints of customers on its website. For the first time, it isn't just banks that feel tough regulation. The agency has also moved to supervise payday lenders, indirect auto lenders and even digital currency firms.
Higher Capital and New Liquidity Requirements
Talk to any big bank representative about Dodd-Frank and they are almost sure to mention how much more capital the largest institutions now hold. Over the past six years, banks have added $600 billion more in capital, Treasury Secretary Jack Lew said Monday . Moreover, for the first time, the big banks now face liquidity rules that force them to hold enough funding to survive a 30-day event. Banks frequently point to these facts as proof that "too big to fail" is over, but critics aren't so sure. Some continue to argue that no amount of capital is enough if we face another crisis and that the largest banks need to be broken up.
The Advent of Stress Tests
Related to capital levels are the annual stress tests that banks above $10 billion of assets now must take as a consequence of Dodd-Frank. The largest institutions face Fed-run stress tests that if they fail could prevent them from paying dividends until they get a new capital plan approved by the central bank. The stress tests have become one of the biggest exercises in banking, requiring a huge amount of manpower both from the Fed and from institutions involved.
The Implementation of the Volcker Rule
Dodd-Frank is already five years old, but one of its most consequential provisions did not go into effect until Tuesday. The Volcker Rule, named after former Fed Chairman Paul Volcker, who suggested it, would ban banks from proprietary trading and investing in hedge and equity funds. Although that sounds simple in concept, its implementation has been a mess . It took the five agencies involved in writing the rule years to complete it, and though it technically takes effect July 21, 2015, all of it will not be effective for at least another two years. Still, the regulation is shaping up to be a game changer.
Drafting Their Own Potential Execution
Among the biggest changes was that banks with more than $50 billion of assets must now draft their own "living wills," resolution plans that regulators can use to take apart a company in the event of a crisis. The most complex banks failed their first attempt at writing resolution plans, with the FDIC and Fed saying they needed to improve drastically by this year's submission or they could face drastic action. The largest institutions submitted new plans on July 1, the public portions of which were released a week later. Fed Chair Janet Yellen said last week that if the plans are not improved, regulators stand ready to act.
