How do the revised rules in the Bipartisan Budget Act of 2015 affect you and your business?
The Dodd-Frank Act is the overarching piece of legislation that is at the root of many of the concerns of the banking world today. The act was passed in 2010 and has been the source of hundreds of pages of new rules for bankers everywhere.
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Locally, a small bank’s take on the legislation depends on to whom you speak. Some say that the regulations are strangling banks’ ability to loan, others appreciate the increased scrutiny on those massive banks that got everyone in trouble in the first place.
This time last year, Republican presidential candidates were decrying Dodd-Frank as an example of government overreach, and GOP nominee Mitt Romney has pledged to repeal it if elected.
Bloomberg News thinks that instead of a repeal, an elected Romney would offer up a “revamped Dodd-Frank that would accommodate some of the most profitable and riskiest activities while preserving a patina of protection for investors and consumers.”
In late August, Bloomberg quoted Mark Calabria, a former top Republican aide on the Senate Banking Committee as saying “There’s this perception that banks hate everything in Dodd-Frank, and that’s just not true. From a bank’s perspective, you’d rather have piecemeal reform of Dodd-Frank, not only because there are things in the law you want to keep, but also because you’re going to have more control over the process.”
Consumer Financial Protection Bureau
This Dodd-Frank-spawned brain-child of Massachusetts Senate candidate Elizabeth Warren just celebrated its first birthday by undergoing an audit of its finances by Judicial Watch.
The Consumer Financial Protection Bureau was charged with increasing consumer awareness when considering financial products such as mortgages and credit cards, in hopes that more financial education would help prevent consumers from biting off more than they can chew, avoiding some of the issues that brought on the recession.
Judicial Watch, according to its website, is “a conservative, non-partisan educational foundation, promotes transparency, accountability and integrity in government, politics and the law.”
In August, Judicial Watch obtained financial records from the CFPB and came to the conclusion that the agency was “spending a surprising amount of money on sign-language translation services, (and) basic banking classes for its lawyers and staff salaries,” according to CNNMoney.
The CFPB said at the time that because it is funded through the Federal Reserve, none of the money was coming from taxpayers’ pockets.
The Volcker Rule
Another product of Dodd-Frank, the Volcker Rule hasn’t yet been finalized, but is already having an impact on private equity.
This rule is one of the most intensely debated aspects of Dodd-Frank, and was included in the legislation to stop banks from making balance sheet bets that could threaten their solvency, including things like proprietary trading, or trading for their own accounts.
The rule was supposed to be implemented in July, but has been delayed by regulators who can’t seem to agree on just how the implementation should be executed. In August, Reuters quoted an anonymous Treasury official as saying that the final rule is now expected by the end of 2012.
Third quantitative easing
In mid-September, the Federal Reserve unleashed a new round of stimulus, called quantitative easing, typically abbreviated as QE3 because it is the third round of such stimulus.
This will include the purchase of $40 billion in mortgage-backed securities each month for an undetermined amount of time. The Fed has said that it will determine the end date of the program after re-evaluating the condition of the economy in coming months.
According to a statement released by the Federal Reserve on the matter, the stimulus “should put downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.”
An effort aimed at alleviating uncertainty on markets not just in the U.S. but in European nations as well, Basel III is the product of a brainstorming session including central bankers and bank regulators in Basel, Switzerland, in September 2010.
In the longterm, Basel III is meant to help banks’ ability to absorb shocks in the market, making the financial system worldwide less susceptible to instability. The New York Times explained how this might be accomplished:
“Under current rules, banks might hold so-called core Tier 1 capital, the most bulletproof category of reserves, equal to as little as 2 percent of their assets. Analysts at Morgan Stanley expect the regulators to raise the required amount to about 8 percent,” the newspaper said.
“In addition, during boom times regulators could oblige banks to raise their reserves an additional 3 percent, to a total of about 11 percent, as protection against a sudden market collapse. According to other estimates, banks might even be required to set aside as much as 16 percent in boom times.”
The rules have been met with mixed reaction by those at the helms of some of the nation’s biggest banks, but Federal Deposit Insurance Corp. Director Andrew Hoenig spoke out against Basel III last month.
Hoenig reportedly told an American Bankers conference that “international regulators should delay new global bank capital rules or the U.S. should reject the rules and rethink how capital standards for financial institutions are set,” according to MarketWatch.