dodd frank explainer
Shares in the US’s biggest banks have been flying high on expectations that President Donald Trump will cast off the shackles imposed by the Dodd-Frank post-crisis financial regulations.
Sticking to a campaign pledge, Mr Trump has said he would “do a number” on Dodd-Frank, but he has not fleshed out what that might entail. The 2010 act’s wholesale abolition is unlikely but the most vulnerable of its 16 sections are clear — and laid out below.
Big changes would need to come via legislation but Congress is not expected to focus on Dodd-Frank until it has made more progress on healthcare, tax reform and infrastructure. What lawmakers want to achieve will matter as much as the White House’s ambitions.
Parts of the bill with fiscal implications could be revised by Republicans with 50 votes in the 100-seat Senate. But they would need some Democrats — who are passionate defenders of Dodd-Frank — to get the 60 votes required to change other sections.
If legislative change proves too hard, revisions could also be made by Trump-appointed regulators operating with the existing law.
Here is a rundown of Dodd-Frank and its vulnerabilities.
I. Financial stability regulation
Dodd-Frank critics would like to see a rollback of its regulation of systemically important financial institutions, or “Sifis”. This could entail legislative reform to raise the $50bn asset threshold at which the strictest bank supervision kicks in; scrapping the FSOC college of regulators that can tag non-banks for closer supervision; and abandoning a requirement for banks to write “living wills” on how they could be wound up in a crisis. On their own, regulators could choose to lighten big bank supervision and free non-banks from the Sifi net.
II. Orderly Liquidation Authority to wind up failing banks
This section is a microcosm of debate over the “too big to fail” problem of taxpayers bailing out troubled banks, which Dodd-Frank was meant to end. It gives regulators the authority to seize and liquidate large, troubled institutions whose disorderly failure could threaten the stability of the financial system. But opponents say it only institutionalised bailouts. There are few changes regulators could make to placate critics.
III. Abolishment of Office of Thrift Supervision
This part of the act eliminated the Office of Thrift Supervision, once a bank regulator, which was blamed for crisis-era failures in its supervision of AIG’s financial products division and others.
IV. Hedge fund & private equity fund registration
Hedge funds and private equity funds are required to register with regulators and comply with certain record-keeping rules. Hedge funds question whether the information regulators request is actually being used. Some Republicans concerned about the private equity industry support a full repeal of the registration requirements. Regulators have the option of cutting back on the data they demand.
V. National co-ordination of insurance regulation
Insurance in the US is regulated primarily at state level, but the Dodd-Frank act created a Federal Insurance Office within the Treasury department to promote better national co-ordination. The FIO also represents the US in talks with international insurance watchdogs. But Republicans, who are wary of international bodies anyway, have said it is not doing enough to champion the interests of US insurers.
VI. Volcker rule and bank capital requirements
Live event: Investing Through Uncertainty
Join FT Commentators in London on March 20 to discuss the turmoil affecting markets today.
The Volcker rule is one part of Dodd-Frank that big Wall Street banks would most like to see scrapped. It limits banks’ ability to place risky bets with their own money via proprietary trading. Critics say it is overly complex and has reduced market liquidity by forcing banks to cut their trading inventories. A separate part of this section demands that banks and other institutions hold more capital to help them absorb losses in future periods of distress. In both areas, regulators wrote detailed rules to flesh out the law which they could scale back.
VII. Swaps market regulation
Driven by the role of unregulated credit swaps in the 2008 crisis, this section created a far-reaching new regulatory regime for the swaps part of the derivatives market. The powers were split between the Commodity Futures Trading Commission and the SEC. A big change was requiring certain swaps to be cleared by a central clearing house to reduce systemic risk. Regulators were also asked to create capital and margin requirements for key market players. Traders have chafed at the rules, saying they raise the cost of doing business.
VIII. Regulating clearing houses
This section subjected the clearing houses that settle financial transactions to new standards and tighter supervision. Republicans, however, say it turned central clearing houses into the next generation of too-big-to-fail entities by authorising FSOC to designate them as systemically important businesses, which critics say carries the implicit promise of government help in a crisis.
IX. SEC powers and investor protection
The SEC was empowered to issue a disparate range of rules covering subjects including investor protection, credit rating agencies, corporate governance and whistleblowers. The section also gave shareholders a “say on pay” vote on executive remuneration. Republicans say many of the provisions had nothing to do with the financial crisis and should be repealed. They also want to streamline the SEC’s “bureaucratic” structure.
X. Consumer Financial Protection Bureau
The CFPB was created to defend Americans against bad behaviour by banks. Banks complain the new regulator has strangled them with red tape. There is an outside chance Republicans will try to eliminate it entirely. More likely is an attempt to rein it in by ending its automatic funding handout from the Fed and switching to funding approved annually by Congress. Some Republicans would like to give the president the power to fire the CFPB’s head. This section also includes the “Durbin amendment” capping debit card fees, which banks hate.
XI. Limits on Fed lending to failing banks
This section imposed new restrictions on the Fed’s ability to provide emergency loans to banks as a lender of last resort, another part of the effort to end too big to fail. The provisions prevent the Fed from bailing out single struggling entities, but preserve its powers to provide liquidity to groups of companies. Some lawmakers subsequently complained they allowed “backdoor bailouts” and launched an effort to change the law. But the Fed calmed the waters in 2015 by tightening its own rules.
XII. Improving access to financial services
This part sought to improve access to mainstream financial services for low income Americans, particularly those who have turned in the past to payday lenders.
XIII. Amending Tarp bailout programme
This cut back the size of the troubled asset relief programme, which was used to purchase distressed assets during the financial crisis.
XIV. Mortgage lending rules
Here Dodd-Frank sought to outlaw the lax mortgage lending practices at the heart of the financial crisis. It authorised the CFPB to issue a host of rules designed in part to ensure that banks only offer loans to people who can pay them back. Republicans say the rules have constricted the credit supply. Banks are particularly eager to see a loosening of the definition of “qualified mortgages”, loans that give them certain legal protections in return for verifying the borrower’s ability to repay.
XV. Resource extraction payments and other provisions
This is where the neutering of Dodd-Frank has begun. The section contains a mix of provisions and Republicans in Congress have already struck at one that obliges US energy companies to report payments made to the US or foreign governments. The SEC issued a rule last year to bring the requirement into force. But in January Republicans moved quickly to nullify the rule using the Congressional Review Act, which lets lawmakers scrap any recently finalised federal regulations. Mr Trump signed the rule’s death sentence on February 14.
XVI. Tax treatment of swaps
Because Title VII threatened to have adverse tax consequences for swaps traders, this section was introduced to prevent them being hit with big tax bills. It works by exempting swaps from being treated as contracts under section 1256 of the Internal Revenue’s tax rules.
Sticking to a campaign pledge, Mr Trump has said he would “do a number” on Dodd-Frank, but he has not fleshed out what that might entail. The 2010 act’s wholesale abolition is unlikely but the most vulnerable of its 16 sections are clear — and laid out below.
Big changes would need to come via legislation but Congress is not expected to focus on Dodd-Frank until it has made more progress on healthcare, tax reform and infrastructure. What lawmakers want to achieve will matter as much as the White House’s ambitions.
Parts of the bill with fiscal implications could be revised by Republicans with 50 votes in the 100-seat Senate. But they would need some Democrats — who are passionate defenders of Dodd-Frank — to get the 60 votes required to change other sections.
If legislative change proves too hard, revisions could also be made by Trump-appointed regulators operating with the existing law.
Here is a rundown of Dodd-Frank and its vulnerabilities.
I. Financial stability regulation
Dodd-Frank critics would like to see a rollback of its regulation of systemically important financial institutions, or “Sifis”. This could entail legislative reform to raise the $50bn asset threshold at which the strictest bank supervision kicks in; scrapping the FSOC college of regulators that can tag non-banks for closer supervision; and abandoning a requirement for banks to write “living wills” on how they could be wound up in a crisis. On their own, regulators could choose to lighten big bank supervision and free non-banks from the Sifi net.
II. Orderly Liquidation Authority to wind up failing banks
This section is a microcosm of debate over the “too big to fail” problem of taxpayers bailing out troubled banks, which Dodd-Frank was meant to end. It gives regulators the authority to seize and liquidate large, troubled institutions whose disorderly failure could threaten the stability of the financial system. But opponents say it only institutionalised bailouts. There are few changes regulators could make to placate critics.
III. Abolishment of Office of Thrift Supervision
This part of the act eliminated the Office of Thrift Supervision, once a bank regulator, which was blamed for crisis-era failures in its supervision of AIG’s financial products division and others.
IV. Hedge fund & private equity fund registration
Hedge funds and private equity funds are required to register with regulators and comply with certain record-keeping rules. Hedge funds question whether the information regulators request is actually being used. Some Republicans concerned about the private equity industry support a full repeal of the registration requirements. Regulators have the option of cutting back on the data they demand.
V. National co-ordination of insurance regulation
Insurance in the US is regulated primarily at state level, but the Dodd-Frank act created a Federal Insurance Office within the Treasury department to promote better national co-ordination. The FIO also represents the US in talks with international insurance watchdogs. But Republicans, who are wary of international bodies anyway, have said it is not doing enough to champion the interests of US insurers.
VI. Volcker rule and bank capital requirements
Live event: Investing Through Uncertainty
Join FT Commentators in London on March 20 to discuss the turmoil affecting markets today.
The Volcker rule is one part of Dodd-Frank that big Wall Street banks would most like to see scrapped. It limits banks’ ability to place risky bets with their own money via proprietary trading. Critics say it is overly complex and has reduced market liquidity by forcing banks to cut their trading inventories. A separate part of this section demands that banks and other institutions hold more capital to help them absorb losses in future periods of distress. In both areas, regulators wrote detailed rules to flesh out the law which they could scale back.
VII. Swaps market regulation
Driven by the role of unregulated credit swaps in the 2008 crisis, this section created a far-reaching new regulatory regime for the swaps part of the derivatives market. The powers were split between the Commodity Futures Trading Commission and the SEC. A big change was requiring certain swaps to be cleared by a central clearing house to reduce systemic risk. Regulators were also asked to create capital and margin requirements for key market players. Traders have chafed at the rules, saying they raise the cost of doing business.
VIII. Regulating clearing houses
This section subjected the clearing houses that settle financial transactions to new standards and tighter supervision. Republicans, however, say it turned central clearing houses into the next generation of too-big-to-fail entities by authorising FSOC to designate them as systemically important businesses, which critics say carries the implicit promise of government help in a crisis.
IX. SEC powers and investor protection
The SEC was empowered to issue a disparate range of rules covering subjects including investor protection, credit rating agencies, corporate governance and whistleblowers. The section also gave shareholders a “say on pay” vote on executive remuneration. Republicans say many of the provisions had nothing to do with the financial crisis and should be repealed. They also want to streamline the SEC’s “bureaucratic” structure.
X. Consumer Financial Protection Bureau
The CFPB was created to defend Americans against bad behaviour by banks. Banks complain the new regulator has strangled them with red tape. There is an outside chance Republicans will try to eliminate it entirely. More likely is an attempt to rein it in by ending its automatic funding handout from the Fed and switching to funding approved annually by Congress. Some Republicans would like to give the president the power to fire the CFPB’s head. This section also includes the “Durbin amendment” capping debit card fees, which banks hate.
XI. Limits on Fed lending to failing banks
This section imposed new restrictions on the Fed’s ability to provide emergency loans to banks as a lender of last resort, another part of the effort to end too big to fail. The provisions prevent the Fed from bailing out single struggling entities, but preserve its powers to provide liquidity to groups of companies. Some lawmakers subsequently complained they allowed “backdoor bailouts” and launched an effort to change the law. But the Fed calmed the waters in 2015 by tightening its own rules.
XII. Improving access to financial services
This part sought to improve access to mainstream financial services for low income Americans, particularly those who have turned in the past to payday lenders.
XIII. Amending Tarp bailout programme
This cut back the size of the troubled asset relief programme, which was used to purchase distressed assets during the financial crisis.
XIV. Mortgage lending rules
Here Dodd-Frank sought to outlaw the lax mortgage lending practices at the heart of the financial crisis. It authorised the CFPB to issue a host of rules designed in part to ensure that banks only offer loans to people who can pay them back. Republicans say the rules have constricted the credit supply. Banks are particularly eager to see a loosening of the definition of “qualified mortgages”, loans that give them certain legal protections in return for verifying the borrower’s ability to repay.
XV. Resource extraction payments and other provisions
This is where the neutering of Dodd-Frank has begun. The section contains a mix of provisions and Republicans in Congress have already struck at one that obliges US energy companies to report payments made to the US or foreign governments. The SEC issued a rule last year to bring the requirement into force. But in January Republicans moved quickly to nullify the rule using the Congressional Review Act, which lets lawmakers scrap any recently finalised federal regulations. Mr Trump signed the rule’s death sentence on February 14.
XVI. Tax treatment of swaps
Because Title VII threatened to have adverse tax consequences for swaps traders, this section was introduced to prevent them being hit with big tax bills. It works by exempting swaps from being treated as contracts under section 1256 of the Internal Revenue’s tax rules.
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