Last Tuesday, December 6, the Senate Banking Committee held a hearing on the banking regulators' implementation of the Dodd-Frank Act. Representatives of the Federal Reserve Board, the FDIC, and the Comptroller of the Currency all testified.
Federal Reserve Governor Daniel Tarullo testified that hundreds of staff members are contributing to Dodd-Frank projects and that the Fed has issued 29 final rules, public notices, and reports and has another 13 rules underway. All told, the Fed expects to issue 60 sets of rules and formal guidelines as part of its implementation efforts. The Board's staff has participated in more than 300 meetings with outside parties.
Governor Tarullo also took the occasion to explain how strong capital requirements remain "the most supple form of prudential regulation, because they can provide a buffer against bank losses from any source." He explained that deficiencies in historic capital requirements included their status as lagging indicators of a bank's condition, that the kind of capital that qualified for regulatory purposes was not uniformly reliable as a buffer against losses, and that capital requirements had been simply too low. Therefore, the Board will integrate Dodd-Frank capital provisions into the Board's overall capital program.
Already, the "Collins Amendment" in Dodd-Frank precludes declines in minimum capital requirements based on bank internal modeling. He advised that the banking agencies would be jointly proposing regulations consistent with "Basel 2.5" market risk capital requirements agreed upon by banking regulators around the world (which the banking agencies did the very next day), as well as internationally agreed-upon Basel III capital requirements upgrading the quality of capital, increasing the quantity of minimum capital, and creating a capital conservation buffer.
The Board will also be proposing additional enhanced risk-based capital requirements for large bank holding companies (those with consolidated assets of $50 billion or more) under Dodd-Frank, but Governor Tarullo suggested that these additional capital requirements might be "quite modest" unless the large bank holding company was globally systemically important.
Finally, Governor Tarullo mentioned that Dodd-Frank-mandated Board stress testing of large bank holding companies and internal stress testing of those between $10 billion and $50 billion in assets would be implemented later in 2012, but that, meanwhile, the Board is using a modified form of stress testing as part of its new capital planning process established for large bank holding companies.
Acting FDIC Chairman Martin Gruenberg noted that it had been 17 months since enactment of Dodd-Frank, explained that the FDIC had sole rulemaking authority under Dodd-Frank in two areas: orderly liquidation authority for systemically important financial institutions and deposit insurance reforms and had completed within a year after passage of Dodd-Frank, five major final rules in those areas.
In implementing orderly liquidation authority, the FDIC, last July, issued a final rule defining how creditors will be treated and how claims will be resolved in an FDIC receivership under the Dodd-Frank Act. The FDIC has also adopted two rules regarding resolution plans. The first, required by Section 165(d) of Dodd-Frank, requires large bank holding companies and non-bank financial companies designated as systemically significant by the new Financial Stability Oversight Council to develop, maintain, and periodically submit resolution plans to regulators. The second, not required by Dodd-Frank, requires all large insured depository institutions to develop, maintain, and submit resolution plans to the FDIC.
In the area of deposit insurance reform, the FDIC permanently increased the standard deposit insurance coverage limit to $250,000 and temporarily, until December 31, 2012, provided for unlimited deposit insurance for "noninterest-bearing transaction accounts." It also changed the deposit insurance assessment base from domestic deposits to average consolidated total assets minus average tangible equity, thereby reducing the share of assessments paid by community banks by about a third ($340 million in the second quarter).
Section 939 of the Dodd-Frank Act requires the agencies to remove references to credit ratings from their regulations which affects capital regulations and regulations governing permissible investments. That requires the development of credit risk metrics that identify gradations of risk in a consistent supportable manner that can be reasonably implemented by a range of banks. The proposed market risk capital rule issued the day after the hearing proposed a specific alternative to credit ratings.
Acting Chairman Gruenberg also discussed joint rules under Dodd-Frank, on which the FDIC was working, including the Volcker Rule, the securitization risk retention rule, swap margin rules, incentive compensation rules, and a stress test rule.
Finally, Acting Comptroller of the Currency John Walsh testified about integration of the functions of the Office of Thrift Supervision into the OCC which has been successfully completed. The Office is now considering substantive amendments to its regulations to reduce duplication and provide for consistent treatment for national banks and federal savings associations. It will also integrate more than 1,000 OTS supervisory policies into a consolidated OCC policy framework, rescinding several hundred OTS documents that are duplicative or obsolete. Also, the Thrift Financial Report (TFR) financial reporting forms are being discontinued and thrifts will instead use the call report forms used by banks.
He also discussed the OCC's coordination with the CFPB explaining how the CFPB has assumed responsibility for conducting examinations for compliance with federal consumer financial laws at national banks and federal savings associations with total assets greater than $10 billion. Meanwhile, the OCC has been processing non-credit card consumer complaints on behalf of the CFPB, but will, in the next several months, turn that work entirely over to the CFPB. The agencies, he explained, also have issued a joint policy statement clarifying how the $10 billion asset threshold will be measured and when.
The OCC has established a Consumer Issues Steering Committee to act as liaison with the CFPB. Acting Comptroller Walsh mentioned that the CFPB is required by law to consult with the banking regulators prior to and during the rulemaking process, citing the example of the "ability to repay" requirements for "qualified mortgages," which he suggested should be carefully coordinated with the "qualified residential mortgage" criteria in the risk retention rulemaking being pursued by the banking agencies, HUD, the FHFA, and the SEC. He indicated that the banking agencies are working to develop an agreement on a consultation process that will give the banking regulators reasonable time. He also said that the banking regulators also have initiated efforts to develop a MOU that will implement examination coordination with the CFPB.
Acting Comptroller Walsh also testified about the OCC's participation in the activities of the Financial Stability Oversight Council, particularly praising the function the FSOC serves facilitating candid confidential exchanges of information among regulators, such as assessments of the situation in European financial markets.
The Acting Comptroller also expressed the need to harmonize Dodd-Frank requirements with Basel III capital and liquidity requirements and the Basel Committee's G-SIB surcharge.
Finally, Mr. Walsh reviewed a number of other Dodd-Frank rulemakings the OCC has undertaken jointly with other agencies, including the credit risk retention rulemaking, minimum margin and capital requirements on non-cleared derivatives entered into by swap (and security-based swap) dealers and major swap (and security-based swap) participants, incentive compensation rulemaking, and the Volcker Rule.
The testimony of all three agencies suggests that considerable Dodd-Frank implementation has been accomplished, much is still ongoing, and much more is still to come.
This will be our last issue for this year. Happy holidays.