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Expected changes to Dodd-Frank - Part Two

Posted by Kapil Kohli
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In my previous blog, I wrote about the ongoing debate on Dodd-Frank Act and much debated changes or amendments to its rules. In this piece, I have picked up a few important changes which are expected to be actively debated for early implementation.

#1 Volcker Rule:

Abolish Volcker Rule which restricts banks from making speculative investments. If removed, it will then allow them to engage in market-making, investment, hedging and underwriting activities which are otherwise restricted under the current rule.

Relaxing the limitations on financial institutions' proprietary trading activities can potentially see elevated participation in market-making activities, also help financial institutions have varied revenue streams' again.

#2 Orderly Liquidation Rule:

Repeal Dodd-Frank’s "orderly liquidation" rules for large, which was to basically support failing financial institutions. It's an indication to move away from concept of 'Too Big to Fail' supported by taxpayer funded bailouts.

The new subchapter of the bankruptcy code specifically for financial firms is proposed which differs from the Dodd-Frank legislation in the way it treats insolvent banks. This will basically prevent taxpayer dollars from being used to bail-out failed or failing institutions.

#3 Durbin Amendment:

Remove price control caps on debit interchange fee for FI having US$10 billion or more in assets, this will essentially to shift the cost-base to card businesses including Issuer/Acquirer & Merchants. The key objective here seems to promote free market principles and technology advancements.

This could essentially result in lower basic banking cost for customers which were imposed after the introduction of Durbin amendment, helping about 8-9 million households in US who don't have a checking or savings account, principally because account fees are too high or unpredictable.

#4 CFPB Powers & Structure:

Repealing Consumer Financial Protection Bureau (CFPB) would be detrimental to the cause of consumer protection, so it's there to stay. However, most likely, balancing of power may see its way through and it will be retained in its diminished form which currently enforces 19 federal consumer protection statutes covering everything from mortgages, personal finance and student loans to credit cards and banking practices.

CFPB would mostly retain its powers under the federal consumer protections laws but would likely be constrained on rulemaking and supervisory powers which may be interfering directly to influence banks business decisions and products.

The CFPB could be shifted to a five member commission (replacing single director agency leadership model) like the SEC and subjected to congressional appropriations, taking away some of the unilateral powers and fixing accountability to congress, seems more politically driven issues.

#5 Qualified Banking Organizations (QBO):

Introduction of provisions/rules under QBO will allow banks to choose between complying with Dodd-Frank or meeting tougher capital requirements to maintain a significantly high ratio of tangible equity to leverage exposure. Bypassing Dodd-Frank provision could become a reality for a few banking organizations (QBOs) who have a leverage ratio of at least 10% and CAMELS ratings of either 1 or 2.

These change that would likely require big banks to raise several billion dollars in new equity to be able to bypass Dodd-Frank, which may be tough for biggies, but proposed changes would most likely be advantageous for smaller banking organizations or the well-capitalized intermediate holding companies of foreign banking organizations who may be positioned to elect QBO treatment - providing them relief from regulatory requirements that either do not apply to them or have no impact on them in practicality.

#6 Key change to Financial Stability Oversight Council (FSOC):

Repeal the authority of FSOC to designate non-bank financial companies as systematically important financial institutions (SIFIs), and retroactively repeal its previous designations of non-bank financial companies.

This could provide some relief to community banks and credit unions under the purview of FSOC who are providing the bulk of small business and agricultural loans, but the combined weight of Dodd-Frank's regulations was always dragging them down. Proposed relaxation in rules is likely to provide stimulus and level playing field to small banks and credit unions and will work against the principle of Big Banks grow even bigger.

FSOC might end-up retaining its authority on oversight to collect information from BHCs and nonbank financial companies and make recommendations to its member agencies.

#7 Qualified Mortgage Rules:

Relaxing the rules around disqualification of mortgage solely based on rigid debt-to-income requirements may be revisited to provide some relief to consumers while providing flexibility for banks including prohibition of excessive upfront fee and points might be seen as a welcome move by many.

Another likely change is to exempt banks completely from 'Qualified Mortgage' rules who are willing to hold the credit on their balance sheet rather than selling them to third parties could be seen by many as a positive step. Certain excessive restrictions on features like Interest Only, Interest set-offs, Balloon Payments and Refinancing could be revisited.

Apart from some of the more popular or if we may use the term 'controversial' provisions discussed above, there are other proposals under consideration to amend the rules of Dodd-Frank Act or otherwise, to lessen the overall burden of existing regulatory framework for participants, like

  • Provisions to conduct annual reviews to end conservative policies of Fannie Mae & Freddie Mac
  • Repeal the FDIC’s systemic risk powers, including its authority to do anything like the Temporary Liquidity Guarantee Program
  • Implement required oversight and cost-benefit analysis to rulemaking by independent financial federal agencies by providing Congressional review of federal financial agency rulemaking
  • Structural reforms to support harmonized rulemaking for OTC derivatives between SEC and CFTC while derivative reforms to remain intact under Dodd-Frank
  • Adding new subchapter on Bankruptcy Code to facilitate single-point-of-entry reorganizations for large financial companies. Would be a replacement for the Orderly Liquidation Authority in Title II of the Dodd-Frank Act, which is briefly touched upon above
  • Repealing the executive compensation provisions under Dodd-Frank

In conclusion, people always have better view of things in hindsight and are fast to conclude,'what is not working'. On similar lines, there are various reforms and changes being contemplated to alter or abolish the existing rules implemented under Dodd-Frank Act, which might be fair, as long as it helps drive the agenda to uplift economic activity, reduce cost of regulatory burden and boost customer & investor confidence. At the same time, the fact that some of these proposed changed could be subject to exploitation by commercial establishments, again can’t be overlooked. Also the overemphasis of some of these provisions to vest too much powers in Congress by hollowing-out the powers conferred in autonomous federal agencies can also create its own imbalances and may impact the ability of financial system to respond with agility, in the time of need.

About Author

Kapil Kohli- Consulting Partner - Banking, Wipro, Ltd.

Kapil is senior consulting leader in Wipro’s Banking Consulting Practice. He has strong blend of experience as hands-on banker covering operations management, audit and compliance in Retail & Corporate banking coupled with global consulting experiences covering consulting practice management, solution sales, business process & solution consulting, innovation in banking & fintech within IT industry. He has been into multiple global & regional roles focused on Retail & Corporate Banking domain practices.

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