Contributing Writer
Six years after America’s financial industry had to be rescued by the federal government, which spent billions of dollars to stabilize the industry, the economy remains at risk of another downturn due to speculation and bailouts.
The Dodd-Frank Act of 2010 promised to overhaul the financial sector. But many of the law’s regulations on proprietary trading, derivatives and the financial wellbeing of the nation’s banks have been delayed or watered down by slow moving federal agencies, notably the Securities and
Exchange Commission and the Commodity Futures Trading Commission.
As of July 1, only 208 of the 398 rules required by Dodd-Frank were complete, according to the American Bankers Association. About 45 percent of rule-making deadlines have been missed.
“The number one thing Dodd-Frank did is change the tone,” said Wayne Abernathy, executive vice president for financial institutions policy with the American Bankers Association (ABA) in Washington, D.C. “The positive is [that] it has brought more attention to financial risks that involve how a bank operates.”
Abernathy said Dodd-Frank has had a negative impact on how banks offer new products to their retail customers. He said no bank wants to offer the new products because of new regulations. “In practice, there has been no new innovation in the last four years,” Abernathy said. He admitted that new technology, including remote check deposits or mobile loan applications, has been introduced in recent years. However, that’s a continuation of new technology that has already been in the pipeline.
Abernathy said new compliance rules have added some costs to banks, but the new rules have made the business of opening new consumer accounts a more difficult and lengthy process. He said opening a new account takes long in the post-recession world. Where it used to take 15 minutes, now that process is 30 minutes as the vetting of new customers has really slowed down the acquisition of new accounts. He said the evaluation of new accounts, even for anti-money laundering and credit worthiness, has made it all the more difficult for banks to bring in new customers.
“We are a small business bank,” said Mike Miller, president and CEO of Long Beach-based International City Bank (ICB). “We are just under $150 million in assets with two branches. Dodd-Frank does not affect us like it would a larger institution.”
Miller said the bank has no mortgages or retail customers. International City Bank strictly deals with Small Business Administration, commercial real estate, working capital and financing deals.
Miller said Dodd-Frank has forced the bank to spend more time and resources on additional compliance. But, he said, with more rules not coming into effect until 2015 and beyond, the costs are still reasonable.
“It’s difficult, but we are still able to meet our compliance obligations,” Miller said. “We can absorb the cost and [time] with the staff we have. Next year or the following year, we will have to add another person.”
In other moves related to Dodd-Frank, big banks have either ended traditional free checking accounts or have raised the average monthly balance needed to get free checking. Other changes directly affecting bank customers include increasing monthly fees, raising fees for overdrafts and out-of-network ATM withdrawals. In some cases, banks are also cutting costs by closing branches and reducing available ATMs.
Volcker Rule
The main component of the Dodd-Frank Act is the Volcker Rule, which was expected to go into effect in 2012, but has been delayed until next year. The Volcker Rule, named for former Federal Reserve Chairman Paul Volcker, imposed restrictions in response to the 2008 credit crisis.
The rule bans proprietary trading or banks from making risky investments with clients’ money instead of their own. It also limits banks’ investments in hedge funds and private equity.
Some large banks have resumed the risky investments and have suffered losses. For example, a JP Morgan Chase trader known as the “London Whale” lost billions of dollars from trading on credit default swaps. Meanwhile, Citibank just agreed to a $7 billion settlement over its handling of mortgage securities.
The Volcker Rule will cost U.S. national banks as much as $4.3 billion to implement, according to a study by the Office of the Comptroller of the Currency. The study’s regulator said most of the costs come from the rules that curb investments, such as collateralized loan obligations. The federal agency also said affected banks will most likely be those with more than $10 billion in assets.
“A lot of big banks got out of that line of trading pretty early,” Abernathy said. “They did it so they would not be caught in the crush. For the most part, banks were minority partners in these funds, so they didn’t depress the value by leaving.” He said most banks got into trading “to get some income,” and have sold them off for a modest profit.
The Volcker Rule was adopted Dec.10, 2013, by five U.S. financial regulators. Abernathy said that the rule’s biggest problem is the challenge for banks to work with five different agencies. Regulators responsible for implementing the Volcker Rule have formed an interagency group to coordinate the multiagency rule.
“It is going to get worse as time goes by,” Abernathy said. The Volcker Rule is one of the most contentious measures arising from the 2010 Dodd-Frank Act.
Banks with assets of $10 billion to $50 billion must follow guidelines from which International City Bank and other small banks in Long Beach are exempt. One requires an annual stress test, which assesses the potential impact of different economic developments on a bank’s losses, revenue, capital and balance sheet.
Abernathy said banks are still learning about the rule and developing pretty rigorous procedures to the new standards.
“Bank supervision is designed to look at future risk,” Abernathy said. “Bank supervision can’t catch problems early enough . . . more supervision needs to be a motion picture and not a snapshot of activity.” Banks also need to comply with the Bank Secrecy Act, which requires financial institutions to help the federal government detect suspicious activity.
Once bank holding companies grow beyond $50 billion in assets, they’re subject to even stricter regulations under Dodd-Frank. They must hold more in reserve as a cushion against losses and may have less control over bonuses and dividends.
“Part of the challenge is that we don’t know when the rest of the rules will be written,” ICB’s Miller said. “There are compliance issues on the way we do business today. We just have to figure it out.”
Miller claimed a lot of the larger banks can take on more regulations. He said what is frustrating for a small business bank is that, “We had nothing to do with the mortgage business. We are kind of being thrown into the mix. But, we would all say that things got out of control. If you didn’t qualify for a mortgage, in the old days they told you to come back when you could qualify. We got totally away from that.”
Miller also questioned whether Dodd-Frank needed to be 700 pages. Many people who have followed the legislation agree that if banks like stability when it comes to regulations, they are in for some uncertain times. Congress has been unproductive, they say, on financial regulation since Republicans took control of the House of Representatives in 2010.
Yet they also concur that the Obama administration has had more than five years to write the rules, however complex, to enforce Dodd-Frank.
While banks wait for additional regulations, the Federal Reserve, led by Chair Janet Yellen, remains supportive of the Central Bank’s post-crisis agenda. In a prepared speech on July 10 to an economic conference, Federal Reserve Vice Chairman Stanley Fischer said the country was making “significant progress in strengthening the financial system and reducing the probability of future financial crises.”
Fischer, an economist and former Israeli central banker who took the Fed’s No. 2 job in May, threw his support behind the Fed’s stress testing program and new requirements that large institutions hold higher levels of loss absorbing capital.
The ABA’s Abernathy wanted to remind everyone that the process is only halfway through. “We are about to get more rules being written,” Abernathy said. “Banks need to remember that half of the proposed regulations have not been finalized.”
(This story was published in the July 22-August 4, 2014 issue of the Long Beach Business Press)

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