Some of the causes for the financial crisis, identified by the Senate Subcommittee on Investigations were “high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street” (Levin & Cobber, 201 1, p. 8). The History of Financial Reform in the United States To fully grasp Dodd-Frank, it is important to understand the history behind financial reform in the United States, which began with the National Bank Act of 1864.
Prior to 1864, the Federal government had very little involvement in regulating banks (Grossman, 2010). The National Bank Act was intended to create a national currency backed by federal funds, a national banking system, and to help finance the Civil War in the United States (Office of the Comptroller of the Currency, n. . ). The legislation also established the Office of the Comptroller of the Currency (COCO) as an independent group that served to charter, regulate, and supervise all national banks and thrift institutions and the federal branches and agencies of foreign banks in the United States.
The National Bank Act was a 29-page document that essentially created the banking system we know today (“Too Big Not to Fail,” 2012). Federal Reserve Act of 1 913 There was little law implemented after the National Bank Act until the Federal Reserve Act of 1913, which established the Federal Reserve System (the Fed) s the central banking authority of the United States (Langley, 2012). Under the Federal Reserve Act of 1 913 and amendments over the years, the Fed is held responsible for America’s monetary policy, supervises and regulates banks, and maintains stability of financial system.
The Fed makes loans to commercial banks and is authorized to issue the Federal Reserve notes that make up America’s entire supply of paper money. The Federal Reserve Act of 191 3 was 32 pages in length (too Big Not to Fail,” 2012). The Glass-Steal Act of 1 933 The Glass-Steal Act of 1933, also known as the Banking Act, was created in n effort to restore confidence in the U. S. Financial industry after the Great Depression by separating investment activities from banking activities (Meyers, 2012). Bank involvement in the stock market was considered the culprit of the financial crash in 1929.
Glass-Steal imposed barriers to prevent the greed behind the Great Depression. The legislation was repealed in 1 999 when key players from the financial arena urged Congress to pass the Grammar-Leach-Bailey Act to reverse Glass-Steerage’s restrictions on bank securities (Weak, 2003). Financial Reform Today Dodd-Frank is the latest financial reform passed by Congress, and by far the most extensive. According to Madame, Dodd-Frank is “the most comprehensive reform since the Glass-Steal Act of 1 933” (2012, Para. 1).
The goals of Dodd-Frank are to implement consumer protections, end bailouts with tax payer money, create a council to identify risks, eliminate loopholes for risky behavior, implement say on pay for executives, protect investors, and enforce strict regulations on Wall Street (House of Representatives, n. D. ). Dodd-Frank lacks clarity and is lengthy, running over 1,000 pages long (New York, 2012). In many cases, Dodd-Frank does not contain explicit rules, but instead creates an outline whereby financial oversight agencies have been charged with conducting research and writing and implementing the rules.
Who Are the Agencies Responsible for Implementing Dodd-Frank? Prior to the financial crisis, the overall responsibility for financial oversight was divided among several different agencies. These agencies and their “varying rules and standards led to certain entities not being regulated at all, with others subject to less oversight than their peer financial firms organized under different charters” (Morrison amp; Forester, 201 0, p. 6). After the financial crisis, analysts pointed to the “many regulatory failures” and gaps in oversight as the reason unethical and illegal practices were overlooked or ignored (Madeira, 2010, Para. ). As a result, the provisions set out by Dodd-Frank included several changes in government oversight, including the creation of new agencies, with the goal of enforcing consistent standards of ethical behavior within the financial industry. The Financial Stability Oversight Committee One of the core agencies created by Dodd-Frank is the Financial Stability Oversight Committee (OFFS), chaired by the Secretary of Treasury Tim Eighteen. The purpose of the OFFS is to foster collaboration between agencies in order to create “collective accountability” in monitoring ethical practices in the financial industry (U.
S. Department of the Treasury, 2012, Para. 1). The committee includes leaders from the U. S. Department of Treasury, the COCO, the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CUFF), the Federal Deposit Insurance Corporation (FIDE), the Federal Housing Finance Agency (FAA), the National Credit Union Administration (NCAA), the Bureau of Consumer Financial Protection (CUFF), the Fed, and a member from within the insurance industry, appointed by the president. Each member has voting rights on the committee (U.
S. Department of the Treasury, 2012). According to Dodd- Frank, the SOC was designed to monitor the financial industry for potential threats, identify gaps in regulation, and make regulatory proposals or recommendations (Morrison ; Forester, 2010). The committee also has authority to impose rules on large banks, such as limiting mergers or acquisitions or limiting a bank’s ability to offer certain financial products (Nicholson, 2010). Bureau of Consumer Financial Protection Another significant agency created by the legislation is the CUFF.
According to the CUFF website, the mission of the bureau is to educate and protect consumers by regulating consumer financial products, including mortgages and credit cards (Bureau of Consumer Financial Protection, 2012). Prior to Dodd-Frank, regulation of consumer financial products was divided among several different agencies. Today, the CUFF is the central agency with authority to regulate the consumer financial services of banks, credit unions, and non-bank financial institutions, such as payday lenders, private mortgage ND student loan lenders, debt collectors, and credit reporting agencies (Slack, 2012).
Debates about the bureau and the extent of its authority continue in Congress (Douglas, 2012). A notable and controversial name associated with the inception of the CUFF is Elizabeth Warren, a newly elected Senator who was a professor at Harvard when Dodd-Frank was enacted (Deeper & McDonald, 2012). Despite her contributions to the bureau’s creation, Richard Coronary was appointed director after Warren failed to garner enough support in the Senate to secure the position (Deeper ; McDonald, 2012).
According to an article from Bloomberg, Warren will be one of the strongest supporters of Dodd-Frank in the Senate and continue to affect congressional debates on the role of the CUFF and Dodd-Frank as a whole (Hopkins ; Dougherty, 2012). Reorganization of Existing Financial Oversight Agencies In addition to the creation of the OFFS and the CUFF, Dodd-Frank also revised the responsibilities and powers of several agencies that existed prior to the legislation.
Originally created in the sass, the CUFF received expanded authority through Dodd-Frank, specifically in the regulation of the swaps arrest (Commodities Futures Trading Commission, n. D. ). According to Gary Gentler, chairman of the CT, the legislation will “lower risk, promote transparency and protect the American public” through “comprehensive regulation” of the swaps marketplace (Gary ; Schneider, 201 0, Para. 2). Dodd-Frank also revised the authority of the SEC, which is led by Chairman Mary L.
Shapiro, who is stepping down next month. Elise Walter, a member of the SEC, was appointed by the President as an interim replacement for Shapiro. The legislation includes more than 90 provisions that require lawmaking by the SEC, which has already begun plans to affect the regulation of securities-based swaps, hedge funds, executive compensation, credit ratings agencies, and whistle blower protection (Securities and Exchange Commission [SEC], AAA). Finally, the FIDE, chaired by Martin J.
Greenberg and the Fed, chaired by Ben Brenan, will continue to have a role in the regulation of the financial industry. The FIDE, the Fed, and the COCO gained additional authority to oversee thrifts with elimination of the Office of Thrift Supervision (Morrison ; Forester, 2010). As interpretation and implementation of Dodd-Frank continues through financial oversight agencies, committees within the U. S. House of Representatives and the U. S. Senate will maintain significant influence over financial reform.
The House Financial Services Committee, chaired by Congressman Spencer Bacchus, has oversight of several the agencies affected by Dodd-Frank, including the Fed, the U. S. Department of the Treasury, the FIDE, the NIACIN, the FAA, and the COCO (Financial Services Committee, n. D. ). Tim Johnston chairs the Senate Banking Committee, which focuses on legislation regarding banking, insurance, and financial markets. According to the committee’s website, current issues include the Dodd-Frank Act and accountability in the CUFF (U. S. Senate Committee, n. . ). Key Players in Financial Oversight While oversight in the financial industry includes new agencies and new responsibilities for existing agencies, it is important to note many of the leaders involved before the financial crisis remain in place post Dodd-Frank. Prior to becoming Secretary of the Treasury in 2008 and chairman of the OFFS, Tim Eighteen was CEO of the Federal Reserve Bank of New York (Weiss, 2008). CUFF Chairman Gary Gentler worked for Goldman Cash for 18 years ROR to heading the CUFF (Bowled, 2010). Mary L.
Shapiro, chairman of the SEC, also worked in several regulatory roles at the CUFF, SEC, and Financial Industry Regulatory Authority prior to her appointment in 2009 (SEC, 201 b). Martin J. Greenberg became chairman of the FIDE in 201 1, but had served on the board since 2005 (Federal Deposit Insurance Corporation, 2012). Ben Brenan, chairman of the Fed, has been in government regulatory roles since the sass (Federal Reserve, 2012). Each of these key players will continue to have a voice on regulation within the financial sector.
What is Dodd-Frank and Who Does it Affect? Dodd-Franks regulatory breadth is deep, diverse, and complex, extending through many layers of our nation’s financial infrastructure including government agencies, congressional committees, various industries and institutions, eventually funneling down to the consumer. The core industries affected include banking and large financial institutions, derivatives markets, housing, and insurance, all of which have been the lifeblood of our economy.
The following paragraphs will highlight the key initiatives set forth by Dodd- Frank and the industries and people it affects. Large Banks and Financial institutions Under Title I of Dodd-Frank, the banking and financial industry must meet compliance standards enforced by the OFFS and the Fed (Kobo, 2012). These new compliance standards have been created in efforts to alleviate the “too big to fail” business mentality held by large banks and financial institutions of the Great Recession of 2008.
The purpose of this initiative is to end bailouts and reduce reliance on tax-payer dollars for corporations with $50 billion or more in assets whose failure could cause instability or systemic risks to the financial system (Williston, 2012). If banks or financial institutions are mimed too big to fail by the OFFS, they face regulation from the Fed including reserve requirements increasing the amount of capital saved or set aside that is not used for daily operating costs or lending.
Title II of Dodd- Frank contains provisions for Orderly Liquidation Authority (OLLA), a rule stating the Secretary’ of the Treasury, in collaboration with the chairman of the FIDE and the Fed, has authority to seize any financial institution whose failure could cause instability to the U. S. Economy (Williston, 2012). These corporations will also have to clearly document and submit their own insolvency plans for liquidation in the event of failure; this is commonly referred to as living wills. Many large banks have already begun submitting their living wills (Liberty, 2012).
What some consider the hardest blow to the banking and financial industry is the Blocker Rule contained in Section VI of Dodd-Frank, named after former Federal Reserve Chairman Paul Blocker (Morrison gamma; Forester, 2010). This 298-page rule prohibits banks and other large financial institutions from owning or investing in hedge funds or private equity funds, and it bans proprietary trading (Kobo, 2012). The Blocker Rule was written in response to the excessive amount of risk taken by the failed Wall Street banks of the 2008 recession in hopes to end shadow banking.
Prior to Dodd-Frank, large financial entities that did not accept traditional deposits, such as hedge funds, along with some members and us bestiaries of large financial corporations who met compliance standards were able to slip through regulatory cracks. The Blocker Rule is slated to go into effect in 2014 (Migrant and Eagles, 2012). Regulators are still in debate over how to distinguish safe transactions from risky ones, like the $2+ lion loss that occurred at JP Morgan Chase earlier this year.
The final big piece of regulation enforced upon banks under Dodd-Frank is the Durbin Amendment, named after its author, Senator Dick Durbin (Phillips-Orb, 201 1). This add on to the original legislation was passed in 201 1 , and it restricts interchange fees placed on merchants by debit card issuers. Many believe the Durbin Amendment will have negative impacts on the consumer, as the interchange fees once placed on merchants will trickle down to the consumer in order for banks to maintain profit margins. Opposing parties pointed to the
Durbin Amendment, or what they refer to as the “Durbin Tax,” when Bank of America announced monthly charges for debit card users in 201 1 . Derivatives Regulation: Rules for ETC Markets Title VII of Dodd-Frank, known as the Wall Street Transparency and Accountability Act of 201 0, will impose regulation on the derivatives market specifically focusing on over-the-counter (ETC) swaps (SEC, 201 c). Swaps are defined as a type of derivative executed in the form of a contract between by two parties who use fluctuations in an agreed upon underlying asset as their basis for measure.
Interest rates, currencies, stocks, bonds, market indexes, ND credit are commonly used underlying assets in a swap (SEC, 201 ad). Under Dodd-Frank, ETC swaps have been divided into two groups, “security- based swaps” governed by the SEC and “swaps” governed by the CUFF (SEC, 201 c). According to the SEC: A security-based swap is defined as a swap based on a single security or loan or a narrow-based group of index of securities (including any interest therein or value thereof), or events relating to a single issuer or issuers of securities in a narrow-based security index.
A swap is any other type of swap including energy and agricultural swaps (Para. 2). The main goal of derivatives regulation is to bring visibility to the ETC swaps market by increasing reporting standards for market participants (Allegro Development, 2012). Swap dealers (SD) and major swap participants (MSP) are required to register as such with the applicable regulator, submit transaction data to swap data repositories (Sods), and to clear and/or collateralized exposure of trades with a Derivatives Clearing Organization (DOC) (CUFF, n. D. ).
The Intercontinental Exchange (ICE) was the first CUFF approved SD, followed by the Depository Trust & Clearing Corporation (ETC) and the Chicago Mercantile Exchange (CAME). Docs include CAME, ICE, and LLC Clearance Ltd. (CUFF, n. D,). The CUFF has estimated 125 institutions will have to register as swap dealers or major swap participants and these entities will have to meet the most stringent of the Dodd-Frank compliance rules. Requirements extend across the board in financial swap markets, including many small and medium-sized market participants (Allegro Development, 2012).
Derivatives regulation will also mandate that market participants meet specified capital and margin requirements defined by their governing bodies. There are some exceptions to derivatives regulation, such as the end-user exception, which excludes some energy companies, hedge funds, and banks from the requirement to clear trades (Kobo, 2012). Until now, the ETC market has been completely unregulated, making new swaps rules a hot topic in the media, amongst the industries it regulates, and their lobby groups (Allegro Development, 2012).
Regulators face challenges in meeting deadlines in ETC markets due to pending litigation brought forth by opposing lobby groups and market participants (Elaborated, 2012). Recently, federal judges have heron out CUFF and SEC rules that enforce position limits on trading, impose registration requirements on mutual funds engaged in derivatives trading, and dictate corporate governance provisions, all of which Were scheduled to go into effect by the end of 2012. These rules were sent back to the regulators for reconsideration.
The federal courts said these rulings are directly related to the breadth of Dodd-Frank as rules have extended to unintended parties such as smaller mutual funds, energy, and commodity markets; a lack of expertise in decision making; and a lack of consideration for consumers. Mary Chipper’s plan to leave the SEC in mid-December may also result in further setbacks. Consumer Protection ; Housing Dodd-Frank created the CUFF to protect consumers from large banks that exercise risky lending practices and to provide the public with information about mortgages and credit ratings (Kobo, 2012).
Their goal is to ensure contractual agreements for loans are written in terms the average consumer can understand, ultimately helping to explain the fine print in mortgage agreements or contracts for other large purchases or investments. The CUFF implemented a 24-hour-toll-free hotlist consumers can call to report issues tit financial services (Migrant and Eagles, 2012). The CUFF is also in the midst of finalizing what constitutes a qualified mortgage with aspirations to finalize the qualified mortgage rule by January 21 2013.
Lenders will be held accountable to investigate buyers and ensure they are able to meet a certain set of criteria in order to afford a home loan. It will be considered illegal for lenders to persuade consumers into loans they cannot pay back and require that all banks and lenders show detailed proof of the borrower’s income in comparison to the debt they take on. Once in their homes it lays UT specific guidelines of how mortgage companies should issue payments and notices (Welters Keller, 2012).
Investor protection & Corporate Governance The Office of Credit Rating was created by Dodd-Frank and is operating under the SEC and CUFF to regulate credit rating agencies and ensure misleading ratings are not imposed on investors (Kobo, 2012, Para. 27). Credit rating agencies must now report their ratings to the SEC. Other rules around investor protection include proxy access and the whistle blower provision. Proxy access was designed by the SEC to grant shareholders access to uncial information and to give them influence over board seats, but was vacated after being thrown out of federal court.
The whistle blower provision is a new law created by the SEC that awards persons who report information on insider trading or other security violations. What is Wrong with Dodd-Frank? Knowing what Congress and financial oversight agencies set out to accomplish with Dodd-Frank makes it easier to recognize its shortcomings. This section reviews flaws, inconsistencies, and opposition to Dodd-Frank. Are Large Banks Still Too Big to Fail? In October of 2009, Alan Greenshank told the U. S.
Foreign Council of Relations that regulators should consider breaking up banks that are ‘too big to fail” (McKee & Layman, 2009). Large banks including Goldman Cash, JP Morgan Chase, and Morgan Stanley are allowed to “borrow at a lower cost because lenders believe the government will always step in to guarantee their obligations” (McKee & Layman, 2009, Para. 2). This gives large banks an unfair advantage over smaller community banks and creates discomfort in the financial community (Brown, 2012). Greenshank went on to say, “If they are too big to fail, they are too big’ (Brown, 201 2, Para. ). Years after Greengage’s notable statement, Senator Elizabeth Warren recommended big banks be broken up by reinstating the Glass-Steal Act (Spacious, 2012). In regard to the Dodd-Frank Act, she states, “The big banks have been lobbying the regulators to try to weaken the rules, to put loopholes in them, to try to delay them and try to get rid of them outright” (Spacious, 201 2, Para. 2). By reinstating Glass-Steal, Warren hoped to limit mega-banks from becoming “too big to fail” (Spacious, 2012).
Senator Sheered Brown and Senator Ted Kaufman proposed the Safe, Accountable, Fair ; Efficient (SAFE) Banking Act (“Brown introduces bill,” 2012). The SAFE Banking Act was constructed to prevent government bailouts and potentially protect against economic collapse. Thirty-three senators supported the proposal; however, it did not pass the Senate (brown introduces bill,” 2012). Put Your Money Where Your Mouth Is – The Cost of Dodd-Frank Standard & Poor (S&P) estimates Dodd-Frank will cut pretax profits among eight of the largest U. S. Lenders by $34 billion (Keller, 2012).
These cuts result from multiple rules set forth by the legislation, including derivatives regulations, the Blocker Rule, ejaculatory compliance costs, larger required contributions to the Deposit Insurance Fund, and the Durbin Amendment (Albrecht & Mahayana, 2012). Albrecht and Mahayana estimated ETC derivatives regulations reduced overall trading revenues in a two-year period, from 2009 to 2011, by 38% or $5. 5 to $6 billion. According to their estimates, the Blocker Rule could have a financial impact of many,’here between $2 and $1 0 billion depending on the interpretation of proprietary’ trading.
S&P estimates regulatory reporting and compliance will cost $2 to $2. 5 billion annually in new technology and personnel (Albrecht & Mahayana, 2012). Another substantial expenditure to banks forecasted by S&P is the assessment rate adjustments to banks’ domestic deposit base, which is estimated to cost $9 and $1 1 billion (Albrecht & Mahayana, 2012). The FIDE, in accordance with Dodd-Frank, determines the assessment rate on the domestic deposit base of banks based on average consolidated total assets minus tangible equity.
In addition to mega-banks, Dodd-Frank may also trigger losses at community banks (Bureau, 2012). The CEO of State National Bank, Jim Purcell, states that Dodd-Frank limits the amount of services his banks can offer, which drives customers back to big banks. Bureau shows in one study that the Durbin Amendment price controls on debit-card fees are “devastating local banks” in Georgia (Bureau, 2012, Para. 4). Purcell also States that, “In fact, big banks-?the very banks at the center of the problems that spurred the enactment of Dodd-Frank-?are among the new laws great beneficiaries” (Bureau, 2012, Para. ). The Durbin Amendment is estimated to cost the largest banks over $5 billion annually (Albrecht gamma; Mahayana, 2012). Too Much Red Tape, Too Much Ambiguity In light of the very complex regulations that Dodd-Frank will impose on the American financial system, there is speculation these rules will influence banks and other financial firms to take their business overseas (Protest, 2011). Bart Clinton, a Commissioner at the CUFF, states the restrictions on proprietary trading and derivatives are too vague (Protest, 2011).
Dodd-Frank States that restrictions do not apply in foreign countries unless there is a “direct and significant connection with activities” in the United States (Protest, 2011, Para. 5). Regulators can interpret this provision a multitude of ways, making it subjective and unclear (Protest, 201 1). Asian and European coagulators, in the midst working with the GAG nations and their own countries to create financial reform, met with members of the CUFF and SEC in November to address their concerns and gain a better understanding of the intended international scope of Dodd-Frank.
The cross-border reach of the legislation is undefined as of yet, but its impact could be significant to the $648 trillion global swaps market. The CUFF aims to apply regulations at foreign-based companies trading with U. S. Clients and to branches of U. S. Companies trading overseas (Brush, 2012, Para. 14). CUFF Chairman Gary Gentler is urging the international swaps community to support the legislation in efforts to end bailouts for companies whose foreign trading activities lead to their demise.
Dodd-Frank and Politics – To Reform or Not To Reform After the Great Recession of 2008 Americans greeted the Presidential Election of 2012 with vigor in hopes to elect a leader capable of economic recovery and restoration, making Dodd-Frank a critical issue that warranted resolve. During the first presidential debate of 2012, candidate Mitt Rooney stressed that he wanted regulation of banks, but did not support excessive reform (Mutation, 2012). Rooney, who took an anti-Dodd-Frank position, stated “too big to fail is the biggest kiss that’s been given to New York banks I have ever seen” (Mutation, 201 2, Para. 8).
He went on to argue, “We need to get rid of that provision because it is killing regional and small banks” (Mutation, 201 2, Para. 8). Republicans and Wall Street stood behind Rooney in hopes he would keep his promise of overturning Dodd-Frank and stop regulation. During the election, Rooney received more than $20 million dollars from the securities and investment industries (Houses, 2012). This compares monstrously to Beam’s Wall Street contributions of only $5. Million. Large banks were supporters of President Obama in 2008, but Roomers stance on deregulation in the financial sector won him their support in 2012.
The Center of Responsive Politics (2012) named the top ten donors for Roomers campaign (from the greatest contribution down): Goldman Cash, $994,1 39; Bank of America, $921,839; Morgan Stanley, $827,255; Joanna Chase, $792, 147; credit Issue, $618,941 ; wells Fargo, $598,379; Dolomite ALP, $554,552; Kirkland ; Ellis, $496,722; Citreous, $465,063; and Barclay, $428,250. Motivated by the potential negative financial implications of Dodd- Frank, Goldman Cash was quick to reverse their support for President Obama (Rapport ; Mullions, 2012).
Under Beam’s leadership, Goldman Cash faced accusations of misdealing in mortgage lending. In April 201 0, the SEC initiated a hearing on Capitol Hill that resulted in Goldman Cash paying a $550 million fine. President Obama openly criticized Goldman Cash for this, leaving top executives feeling personally attacked. President Obama referred to banking executives as “fat cat bankers” insist dating that Wall Street Coos were the catalyst for the greed and wrongdoings that led to he economic crash of 2008 (Rapport & Mullions, 2012).