BY JOHN ALAN JAMES
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama on July 21, 2010.
In the ensuing two and a half years, the legislation has produced 129 rules that have been finalized. They cover more than a dozen different areas, are implemented by seven major regulatory organizations, including the new Consumer Financial Protection Bureau (CFPB), affect the operations in another half dozen agencies and assign powerful oversight to a new Financial Stability Oversight Council (FSOC).
The major responsibility of the council, along with the Federal Reserve Bank, is to oversee the strategies and operations of “systemically important” banks and nonbanks. The impact on financial institutions, large and small, and in every sector of the economy has been an onslaught of thousands of pages of complex and detailed regulatory language and “allowing” affected organizations up to 60 days to comment on the proposed regulation.
Financially strong organizations have been forced to expand internal staffs, create new recruitment and training programs and take on new compliance and regulatory costs in the millions of dollars. Less affluent organizations, especially community banks and small foreign bank operations in the U.S., have faced tough decisions on how to cope with the regulations and harder yet to find the funds to support these new non-income-producing requirements.
As we approach the third year with Dodd-Frank we are aware that an additional 137 rules, many of the legislative core reforms are yet to be completed. The level of uncertainty, currently high, can only increase as these new rules come into being, one by one, or in bunches. Combined with the lack of certainty as to the final requirements for stress tests and the level of assets needed to back loans and investment it is little wonder that the reluctance to make loans remains significant.
Of perhaps greater importance is the indecision on resolving major issues such as the Volcker Rule, the “living will” and defining standards, definitions and rules governing derivatives.
Paired in the Congressional decision-making process with the debates on how to “avoid going over the cliff,” it is likely that the level of uncertainty will increase.
The remaining 137 rules will have to deal with legislative goals relating to “reforms” in key areas such as: financial stability, resolution planning, agency oversight, securitization, derivatives, investor protection, credit rating agencies, executive compensation, corporate governance, disclosure, capital requirements, regulation of foreign banks, consumer protection, mortgage origination and servicing and more.
Obtaining Congressional agreements on any of these remaining areas will be even more difficult. Even with the 129 rules that have been finalized, House committees have called agency chiefs to task over the effectiveness of their cost-benefit analyses. These are more than stalling tactics as the courts have also complained about the inadequacies in this area so critical to businesses.
One area of recent discussion that troubles me is the broadening of the oversight of systemic risk. Banks have made efforts to meet securitization goals, provided scenarios on major and potentially disastrous risks, and have paid huge fines for violations of what are ill-defined regulations. Top bank officials have regular meetings with regulatory officials at all levels. They have found the expansion of systemic risks to include both counter-party risk and the stability of business customers to be an unrealistic overreach. I agree.
No one believes more in the need for effective and efficient regulation than I. However, I wonder if the lack of understanding of what business management entails, or possibly a deeper distrust than their off-the-cuff derogatory remarks convey, may be leading our regulators to install a regulatory system so complex and costly that the important function of financial institutions – to raise and provide capital for the other two economic sectors (manufacturing and public) – is encumbered. The nation’s economy would suffer from an overburdening regulatory system inhibiting both investment and new jobs creation.
Do you think this is only about banks? Think again. If you have a charge account with a customer or run a tab at your café or bar, the CFPB will be in your life, and, soon.
There is no question that the subjects of compliance, internal controls and regulatory strategy are among the most important issues that any business, bank or nonbank, is facing and will continue to face as we finish the rollout of Dodd-Frank.
Whether a financial institution facing the regulatory tsunami today or another organization line of business or sector – including public sector finance – each board and executive management needs to take a new look at their own strategic planning, risk management and compliance organizations.
John Alan James is executive director of the Center for Global Governance, Reporting & Regulation at Pace University’s Lubin School of Business. He is also program director for Pace’s Certified Compliance and Regulatory Professional certificate program, organized in conjunction with the Association of International Bank Auditors.