Dodd-Frank Wall Street Reform and Consumer Protection Act Overview

Florida Government FinanceOfficers Association – 2012 Annual Conference

Presented by: James ReillyDirector Dodd-Frank Act Implementation

Ravi SubbarayaHead, Business Banking Products

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Financial Crisis

A confluence of events contributed to the

financial crisis

Creation of complex, opaque financial assets

Fair value accounting

Unrealistic consumer expectations

Lowered underwriting standards

Failure of rating agencies to adequately assess the inherent risk of these assets

Accommodative monetary policy

Transfer of assets from banks’ balance sheet to global markets

Excess leverage at financial firms, primarily investment banks

Failure of regulators to identify and correct emerging weaknesses

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Financial Industry Change Then…

Legislative response to the Great Depression brought a decade of broad structural change to the U.S. financial industry:

The Banking Act of 1933

• Created the FDIC

• Glass-Steagall Act separated commercial/investment banking

• FOMC elevated independent monetary policy

Securities Act of 1933

Securities Exchange Act of 1934

Trust Indenture Act of 1939

Investor Advisors Act of 1940

Investment Company Act of 1940

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And Now… Dodd-Frank Overview

In contrast to previous legislation, the Dodd-Frank Act was largely a partisan bill that was debated for less than a year in Congress.

The Act, together with the rigorous capital and liquidity standards proposed by Basel III, will create a significant challenge in the coming months and years.

Over 240 rulemakings and 96 agency studies are necessary to fully implement the legislation. While most of this regulatory action has started less than 30 percent of the rules have been finalized to date.

Complexity of implementation is significant; it will be costly and time consuming.

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Key Themes of the Act

Theme Description

Consumer and Investor Protection Bureau of Consumer Protection Preemption Interchange Fees SEC Investor Protection authority Mortgage Reform / Increased Disclosures Durbin Amendment

Market Stability, Enhanced Prudential Standards and Systemic Risk

Enhanced prudential standards•Capital, leverage, liquidity, credit concentration limits•Living Wills•Stress Testing•Early Remediation

Financial Stability Oversight Council Office of Financial Research Collins Amendment “Basel III”

Prudential Regulation and Supervision Regulatory Restructuring•Enhanced FDIC supervision•Enhanced rules on acquisitions•Enhanced Fed role•OTS Eliminated•CFTC / SEC oversight of derivatives

Restrictions on Bank Activity Volcker Rule•Proprietary Trading•Hedge Funds/Private Equity Funds

Swap Push-out

Transparency and Disclosure OTC Derivatives•Clearing/Exchange Trading•Position Reporting•SEC/CFTC Oversight

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Regulatory Environment Has Also Changed

In the U.S. there exists a regime of functional regulation whereby specific entities are regulated according to the activities in which they are principally engaged (e.g., commercial/retail lending, investment banking, insurance).

Accordingly, there are multiple regulators that supervise the various activities of banks and their holding companies, sometimes at cross purposes and with somewhat conflicting concerns

• Federal Reserve

• Office of the Comptroller of the Currency

• Federal Deposit Insurance Corporation

• Commodity Futures Trading Commission

• Securities and Exchange Commission

• National Credit Union Administration

• Consumer Financial Protection Bureau

• State Banking/Insurance/Securities Authorities

• State Attorneys General

• SROs

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Regulatory Environment Has Also Changed

Through statutes and implementing regulations very specific policies exist regarding capital, leverage, liquidity, executive compensation, safety and soundness, financial reporting, credit, commercial and retail lending and affiliate transactions, among others.

Mandates are enforced through general and targeted examinations which are ongoing throughout the year.

In large financial institutions a sizeable number of examiners are in residence and engage in continuous discussions with management.

The DFA will expand the scope and tenor of the supervisory process through extensive data collection and peer group analysis.

“Macroprudential” regulation, systemic risk and TBTF will become key themes going forward.

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Affected partiesOld New Old with new powers Can request information Has authority to examine

Source: JPMorgan Chase

Investment Advisory

DerivativesConsumerLending

CommercialLending

Broker-dealer

RetailBanking

Alternativeinvestments

Investment Banking

Payment and

Clearing Systems

CFTC FDIC

OFR

Office of theComptroller

of theCurrency

FINRA

OFAC / FinCEN

FSOC

State RegulatoryAuthorities and AG’s

SEC

CFPB

FEDERAL RESERVE

Financial Agencies:Lines of Reporting:

Caught in the WebWho can do what to whom

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Key Takeaways

The Dodd-Frank Act (“DFA”) is over 2300 pages long and requires over 240 rulemakings and close to an additional 100 studies and reports for full implementation.

The DFA creates new offices and agencies (e.g., the Consumer Financial Protection Bureau, the Financial Stability Oversight Council) that have a broad scope and mandate.

Loss of pre-emption of federal consumer financial laws will require compliance by banks with national charters with the laws of each state in which they do business. This will become an ongoing compliance burden .

Volcker Rule, as currently proposed, has a broad extraterritorial impact and many unintended consequences.

The Durbin Amendment (debit card swipe fees) resulted in a very meaningful transfer of revenues from banks to retailers with no discernable benefit for consumers.

Enhanced Prudential Standards (capital, leverage, liquidity, stress tests and resolution planning) will be difficult to implement an will require ongoing reporting and updating.

Agencies have admitted they will not meet statutory deadlines in many areas. This will add to implementation risk.

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Business Impacts and Implications

Implementation of DFA = Significant investment in resources to understand and implement new rules = Higher Cost

Creation of new offices and agencies (e.g., the CFPB) = New regulators, Stricter do’s and don’ts = redesign disclosures, enhanced reporting

Durbin (and prior to that Reg. E)= Lost fee revenue = end of free checking

FDIC Assessment Based Change = based on assets not deposits = adjusts of bank quality

FDIC Protection on Non Interest Bearing = Collateral Costs

Reg. Q = Beginning of the End of Non Interest Bearing Checking = lower interest income

Loss of pre-emption: Product & pricing vary by state = collateral, training, compliance becomes state specific = higher costs e.g., Gift Cards

Enhanced Prudential Standards (capital, leverage, liquidity) = Rethink asset mix

Delays in implementation = Uncertainty and change = moving targets

Results

Higher banking costs for Consumers and Businesses

Higher costs for Banks

Redirected investments

Fewer Banks

Results

Higher banking costs for Consumers and Businesses

Higher costs for Banks

Redirected investments

Fewer Banks