By Randy Myers
When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, says Scott Talbott, it wrote a check regulators cannot cash, at least in the time frame Congress allotted.
Dodd-Frank has been called the most sweeping reform of financial regulation in the U.S. since the Great Depression. To date, regulators have succeeded in completing only about 5 percent of the regulations and studies required by the new law, Talbott told participants at the 2011 SVIA Fall Forum. That doesn’t count work on the so-called Volcker rule, a part of Dodd-Frank still being developed to prohibit U.S. banks from engaging in proprietary trading.
Talbott, senior vice president for government affairs at the Financial Services Roundtable, a trade organization, said the Dodd-Frank regulations that have been completed represent only about 3 percent to 4 percent of the impact the law will eventually have on the financial markets and its participants. Fully implemented, he said, the law will decrease GDP by about 3 percent, increase borrowing costs 25 to 50 basis points, and cost the economy jobs.
“The total cost of compliance so far, just for the rules that have been rolled out, is about 3 billion man-hours,” Talbott said. “That’s equivalent to about 15,000 employees working full-time on compliance. And that is before we even get to the rest of the regulations. So the worst is yet to come.”
Talbott noted that regulators still haven’t produced anything definitive on the regulation of over-the-counter derivatives contracts, for example. That portion of the law, along with the Volcker rule, is expected to account for about 50 percent of the impact on the financial markets.
One reason regulators have missed 70 percent of the deadlines imposed by Dodd-Frank, Talbott said, is because they’re understaffed. While Republicans have chosen to withhold funding in an effort to slow them down, he said his organization would prefer the regulators get the money they need so that they can craft good rules. “We’d rather have regulators take the time and do it right,” he said, “than issue a bad rule and have it overturned.”
Before taking questions from the audience, Talbott ran down the status of several of Dodd-Frank’s major components:
Living wills. Dodd-Frank requires that financial institutions write plans for their own demise should their fortunes take a turn for the worse. While regulations have been issued, they have yet to be implemented. Talbott characterized the living-will requirement as a “big deal” for the nation’s smaller financial institutions but “more of an annoyance” for the larger ones. Fortunately, he said, “it has a long phase-in period we can work with.” The biggest concern many financial institutions have, he said, revolves around the possibility for their proprietary information to become public.
The Volcker rule. “This is a behemoth,” Talbott said. “No other proposal raises more questions than it answers than this one.” Regulators, he noted, came out with a proposed rule that posed 200 questions to the industry, each with three or four additional sub-questions. “It’s a mess,” he said. “We can’t even figure it out. The cost of compliance is going to go through the roof.”
Non-bank systemically important financial institutions. Dodd-Frank requires additional regulatory oversight and tougher capital and liquidity requirements for “systemically important” financial institutions. Regulators, Talbott said, are still trying to figure out exactly what qualifies as a “SIFI,” and a preliminary outline they’ve issued does not provide a lot of clarity.
Derivatives. Dodd-Frank requires that over-the-counter derivatives transactions be run through a clearinghouse or an exchange, but regulators haven’t determined for sure yet what qualifies as a derivative. The law does provide for an end-user carve-out from compliance, but since the counterparty to most end-users will be a financial institution, there’s concern about how much relief a carve-out might offer. “We have a couple little proposals, but there are major pieces of this regulation yet to be rolled out,” Talbott cautioned.
Interchange fees. The banking industry lost to merchants, Talbott said, when Dodd-Frank specified that banks should have limits on what they can charge merchants via interchange fees on debit-card transactions. Interchange fees are charged between banks for the accepting card-based transactions, and they are deducted from what the merchant receives for a sale. Before Dodd-Frank, Talbott said, interchange fees averaged 44 cents per transaction, and now they are half that.
Consumer Financial Protection Bureau. Dodd-Frank created the CFPB to protect consumers of mortgages, credit cards, and other financial products and services. Opposed by many Republicans, it remains something of a toothless agency, as Congress has thus far blocked efforts by President Obama to appoint a director. “You can’t issue rules without a director, so it’s just sitting there, doing a lot of studies and focus groups and filling out disclosure forms,” Talbott said. He noted that the financial services industry is skeptical of the CFPB. “The goal is to let a consumer walk into any financial institution and compare terms between bank A, B, and C, so that they can make an informed decision,” he explained. “At first blush, that sounds good. What we’re worried about is that this push toward comparability will lead to a homogenization of products. If banks only compete on one or two terms, all products will tend toward one or two things—although regulators say that’s not what they want.”
Mortgages. Dodd-Frank made a number of changes designed to tighten mortgage underwriting standards, and also specified that financial services firms that securitize mortgages retain 5 percent of the associated risk. While that’s a sound idea, Talbott said, financial services firms aren’t happy with how the proposed risk retention levels would be implemented. When the industry balked, for example, at the idea of having to retain 5 percent of the risk on very sound mortgages, regulators proposed to drop the requirement for mortgages featuring a 20 percent down-payment by the borrower. The mortgage industry is pushing for a 10 percent cutoff.
Regulators also have proposed that when securitizing mortgages, lenders establish a “premium capture reserve account” where they would hold anticipated profits in a first-loss position against any losses that security generates. The industry argues this would make securitization so unprofitable that lenders just won’t do it, reducing the amount of money available to consumers for mortgages. “So far, the regulators have been somewhat willing to listen,” he said.
Talbott cautioned that contrary to the hopes of some in the financial services industry, Dodd-Frank is not going to be repealed. It is popular politically, he said, and will be a big part of President Obama’s campaign platform. “We will be able to fine-tune it and make tweaks,” he said, “but even that’s not going to happen until 2013 or 2014.”