Dodd-Frank Implementation Defended by U.S. Regulators

U.S. regulators told lawmakers they are making significant progress to prevent a repeat of the 2008 credit crisis, pushing back against complaints of slow progress and efforts to undo parts of the Dodd-Frank Act.

Officials from agencies including the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., testifying today at a Senate Banking Committee hearing on implementation of the 2010 regulatory overhaul, delivered opening remarks that highlight finished work and rules nearing completion while warning against attempts to roll back key provisions of the law.

“Efforts to repeal the Dodd-Frank Act in whole or piecemeal or to starve regulators by underfunding them will hamper growth, allow uncertainty to fester, and be corrosive to the strength and stability of our financial system,” Mary Miller, Treasury undersecretary for domestic finance, said in her statement. “Progress we have made so far is because of the reforms that we are putting in place, not in spite of them.”

Fewer than half the rules mandated by Dodd-Frank have been implemented by regulators, according to data compiled by Bloomberg. Among the measures awaiting completion are the Volcker rule ban on proprietary trading, and rules designed to increase transparency in derivatives markets and improve consumer protections for mortgage borrowers.

‘More Stable’

“Successful implementation of the various provisions of the Dodd-Frank Act will provide a foundation for a financial system that is more stable and less susceptible to crises, and a regulatory system that is better able to respond to future crises,” Federal Deposit Insurance Corp. Chairman Martin J. Gruenberg said in his remarks. “Significant progress has been made in implementing these reforms.”

In addition to Miller and Gruenberg, the Senate Banking Committee is hearing from Fed Governor Daniel Tarullo, Comptroller of the Currency Thomas Curry and Consumer Financial Protection Bureau Director Richard Cordray.

Tarullo’s statement lays out specific target dates for remaining Dodd-Frank provisions and other banking rules. The Fed this year will propose risk-based capital standards for the largest banks and Basel III international capital standards will be finalized “this spring,” he said.

“I think there is a widespread view that the proposed rule erred on the side of too much complexity,” Tarullo said of Basel, speaking to community banks’ arguments that they should be exempt from the standards and large banks’ complaints the accord’s classification of mortgages would constrain credit.

Early Remediation

The Fed plans to finalize its proposal for enhanced prudential standards and early remediation for systemic banks, Tarullo said. The central bank will conduct a quantitative impact study of its single-counterparty credit limit rule, he said. That step would effectively delay implementation of the measure to limit interconnectedness of large banks, which has been strongly contested by industry groups.

Senator Tim Johnson, the South Dakota Democrat who leads the Banking Committee, used his remarks to seek confirmation of Cordray. The consumer bureau chief was renominated this month by President Barack Obama, who gave him the job last year in a recess appointment after Republicans blocked consideration.

“He has done good work, and I urge my colleagues to confirm Director Cordray to a full term without delay and allow the CFPB to continue its important work,” Johnson said.

Qualified Mortgages

Cordray told lawmakers that the qualified mortgage rules his agency adopted last month to ensure lenders determine a borrower’s ability to repay strike “an appropriate balance to ensure consumers can continue to access this source of valuable and responsible credit.”

With that measure complete, six regulators are drafting a so-called qualified residential mortgage rule in which they must decide whether to go beyond the consumer bureau’s rule and whether to maintain a 20 percent down payment requirement.

“I am committed to completing these rulemakings as quickly as possible while recognizing the need to carefully consider and address the important issues that commenters have raised with the proposals,” Curry said.

Senator Michael Crapo of Idaho, the Banking Committee’s top Republican, questioned whether Dodd-Frank rules are “too complex, offering confusing and often contradictory standards and regulatory proposals.”

“I am concerned that the regulators do not understand the cumulative effect of the hundreds of proposed rules, and that there is a lack of coordination among them, both domestically and internationally,” Crapo said in his opening statement.

Tracking Report

Of the 398 Dodd-Frank rules, 148 have been finalized and 124 haven’t yet been proposed, according to a Feb. 1 tracking report released by law firm Davis Polk & Wardwell LLP . Regulators have missed 279 Dodd-Frank rulemaking deadlines, according to the report.

With respect to the refined so-called living wills for complex financial firms required by Dodd-Frank, Gruenberg said regulators will focus on obstacles to orderly resolution and bankruptcy including global cooperation and the risk of “ring-fencing.”

“To assess this potential risk, the firms will need to provide detailed, jurisdiction-by-jurisdiction analyses of the actions each would need to take in a resolution, as well as the discretionary actions or forbearances required to be taken by host authorities,” Gruenberg said.

The living wills are meant to be self-written plans for financial firms to shut themselves down through an orderly bankruptcy if faced with failure. Last year, 11 of the largest banks were required to file plans, including JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc. Those banks face a second filing deadline July 1.

‘Legal Certainty’

Securities and Exchange Commission Chairman Elisse Walter said her agency’s final rules and interpretations of the law’s derivatives section has provided a road map to implementation and “legal certainty to market participants.”

The SEC hasn’t addressed security-based swaps provisions for cross-border application piecemeal and instead plans to address them “holistically in a single proposing release.”

“We believe this approach will provide investors, market participants, foreign regulators and other interested parties with the opportunity to consider, as an integrated whole, the Commission’s proposed approach to the application of the security-based swap provisions,” she said in her statement.

Clearing Rules

Gary Gensler, the chairman of the Commodity Futures Trading Commission, said his agency will soon complete a rule exempting inter-company swaps from clearing rules and take up clearinghouse changes to meet international standards.

One area of concern, he said, is that banks may be helping hedge funds circumvent rules meant to reduce market risk by routing trades through overseas offices.

“The CFTC is working to ensure that this idea does not prevail and develop into a practice that leaves the American public at risk,” Gensler said in the prepared remarks.

International regulators including the CFTC are expected to complete collateral requirements for non-cleared trades in the second half of this year, Gensler said in his statement.

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