Like it or Not, Financial Reform is Reality

Some are calling it the most sweeping financial overhaul since the Great Depression. Whatever you may think of it, it is headed to the President’s desk for signing. In case you haven’t had a chance to read the 2,300 page document, highlights of the Dodd-Frank Bill include:

Consumer Financial Protection Bureau: Within the Federal Reserve, this new agency will be charged with the task of adopting and enforcing rules against hidden fees, abusive terms and deceptive practices. Companies that will be subject to these rules include: banks, credit unions, mortgage companies, private student lenders, credit card issuers, payday lenders, debt collectors and consumer reporting agencies. It will be up to the new consumer watchdog to ensure that consumers get clear and accurate information.

Ending Too Big To Fail: With the Treasury at the helm, regulators will set standards and establish procedures to safely and orderly shut down and break apart large institutions that are failing. This would include firms like AIG and Lehman Brothers whose legal structure had kept them out from under bank regulations.

Regulatory capital requirements for large bank holding companies will be at least as strict as those that exist for community banks now. Excessive growth and complexity will be discouraged with increasingly strict rules for capital, leverage, liquidity, risk management and more as companies continue to grow. If growing by acquisition, a company will not be allowed to have more than 10% of the liabilities in the financial system. 

Systemic Risk: A new Financial Stability Oversight Council will have the task of identifying and responding to new risks to the financial system as they emerge. Placing limits on the size and scope of large, interconnected firms is meant to serve as an early warning system for future problems.

Large, complex financial institutions will periodically submit their own funeral plans, that is, plans for their rapid and orderly shutdown in the event of failure.

Derivatives: To have a better idea of the value of any given derivative, most would have to be traded through clearinghouses and exchanges. These requirements will have to be met by dealers and major participants but small banks and credit union may get qualify for an exemption.

Hedge Funds: For the first time in history, hedge fund advisors will have to register as investment advisors with the SEC and provide them with information about their trades and portfolios. States will regulate those with assets under $100 million; those with assets of $100  million and greater will be under federal regulation and supervision.

Volcker Rule: Banks, bank holding companies and bank affiliates will no longer be able to engage in proprietary trading,  (in other words, they can’t speculate with the bank’s capital). This is meant to separate the business of banking from that of speculating.

Credit Rating Agencies: Credit rating agencies such as Standard & Poor and Moody’s that give investment advice will be under the watchful eye of the new Office of Credit Ratings at the SEC. They will be required to disclose their methodologies and track ratings and be scrutinized for possible conflicts of interest.