In 2010, following what has been described as the worst financial crisis since the American Great Depression, the U.S. Congress proposed and passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The Dodd-Frank rules were broad and affected every aspect of the U.S. financial system, including implementing restrictions on Wall Street investment firms, ending bailouts because certain banks were considered ‘too big to fail,’ creating a new federal agency to institute strict new and revised rules for consumer financial protection, and creating a new group to identify and respond to risk within the system.
What Reforms Did Dodd-Frank Rules Bring to the Banking and Financial System?
Dodd-Frank regulations brought major reforms to banking and finance, including, but not limited to:
1. Changes to the organization of federal regulatory agencies. Dodd-Frank eliminated the Office of Thrift Supervision, a federal regulatory agency under the U.S. Department of the Treasury which had the authority to supervise institutions holding a national thrift charter (commonly called “thrifts” or “savings banks”). After a phase-out period, all nationally chartered thrifts were moved under the Office of the Comptroller of the Currency (OCC) for supervision. The OCC is also part of the U.S. Department of the Treasury.
2. Creation of a new regulatory agency, the Consumer Financial Protection Bureau (CFPB). The CFPB’s creation and its summary role of consumer financial protection have caused a ground swell of supervisory activity across the U.S. financial system.
Until the CFPB was created, commercial banks were subject to supervision by their provincial regulatory agencies. Federally-chartered banks (“National Banks”) were generally supervised by the Office of the Comptroller of the Currency (OCC). These banks either have “national bank” in the bank name, or, the bank name may be followed by “N.A.,” or “National Association.”
State-chartered banks were supervised by the state issuing the bank charter. Additionally, state-chartered banks must also be assigned to a federal banking agency for oversight of federal requirements common for all U.S. banking institutions, such as deposit insurance. Banks may become members of the Federal Reserve System and be supervised under one of the 12 regional Federal Reserve Banks (FRB), or, may elect to be supervised by the Federal Deposit Insurance Corporation (FDIC).
The CFPB now has direct jurisdiction to supervise consumer protection laws and regulations for banks over $10 billion in assets. The CFPB shares examination responsibility for those banks with the banks’ provincial regulators.
3. Organization of supervisory functions for non-bank financial services providers and other financial companies. There are a number of non-bank financial service providers in the U.S. financial system. Pay day lenders, money transmitters, credit reporting agencies, credit card companies (non-bank owned), student loan companies, and mortgage companies (non-bank owned) are just a few. Prior to the creation of the CFPB, the supervision of these types of financial service providers was disjointed at best. The CFPB now sets consumer protection policy and implements consumer financial protection for these other non-bank financial businesses.
4. Restructuring of consumer protection law and regulation policy-making and administration. Prior to the implementation of the CFPB, consumer protection policy-making and administration of consumer protection laws and regulations for banking were primarily the responsibility of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. Certain other consumer protection requirements were administered by other federal offices and agencies, such as the U.S. Department of Housing and Urban Development published the Real Estate Settlement Procedures Act (RESPA); however, enforcement of the requirements in banks was the responsibility of the federal bank regulators. When the CFPB became operational, policy-making for and administration of financial consumer protection regulations was swept almost entirely to the CFPB from the other federal agencies. Some regulations or laws were not completely moved to the CFPB; however, in many cases, the CFPB now has authority to correspond with the agency holding the administration of the regulation or law.
5. Regulating financial markets and creating transparency for certain investment sectors. Dodd-Frank rules include the ‘Volcker Rule,’ a legal requirement named for former Federal Reserve Board Chairman Paul Volcker. The rule limits banks’ investment practices and implements strict regulation for derivatives trading.
6. Placing restrictions on executive compensation for large “Wall Street”-type financial companies. The Dodd-Frank rules give power to shareholders on issues of golden parachutes and executive compensation packages.
7. Establishing the Financial Stability Oversight Council (FSOC). The FSOC is comprised of representatives of ten federal financial regulators, one independent member, and five non-voting members. Its purpose is to identify and respond to risks that may emerge within the financial system.
Dodd-Frank rules have been implemented in a tiered fashion since its passage in 2010. Its breadth and depth has just begun to be felt throughout the financial services industry. For a more detailed view of the law, please see the U.S. Senate Brief Summary of the Dodd-Frank Wall Street Reform and Consumer protection Act at: http://www.banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf