US regulators are straining to keep pace as they write more than 200 rules to rein in risk-taking throughout the financial system.
A year after the enactment of the Dodd-Frank financial oversight law, regulatory agencies have finalized only a handful of reforms (50) but are expected to pick up the pace during 2-H of the year.
Lobbyists and Wall Street executives, as part of their efforts to delay and scale back reforms, are raising pointed questions about whether Dodd-Frank will hamstring the economic recovery. A broad rollback of reforms is not expected, at least in the near-term.
Here is a view of some Key regulatory reform areas:
The new Global Basel III pact, approved by the G-20 last year, is forcing big banks to thicken their capital cushions, with US banks generally further along than their non-US counterparts.
In June, Basel negotiators released a plan requiring global “systemic” banks; a group expected to include JPMorgan Chase & Co (NYSE:JPM), Bank of America Corp (NYSE:BAC), Citigroup Inc, (NYSE:C) Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS) and Wells Fargo & Co (WFC), to hold up to an additional 2.5% capital buffer. Another 1% Surcharge would be imposed if a bank becomes significantly bigger. That would come on top of the minimum 7% risk-based capital requirement for all banks.
US regulators are expected to start writing rules in the next few months, largely in line with the Basel agreement.
Dodd-Frank does not explicitly cap bank pay. Instead, it tries to remove financial incentives for bankers to take big risks that prioritize short-term profits regardless of those bets’ long-term performance.
The law requires regulators to regularly review financial firms and prohibit any pay practice that “encourages inappropriate risks.”
Beyond that, US regulators proposed that executives at the largest financial institutions, such as Bank of America and Goldman Sachs, have 50% of their bonuses deferred for at least 3 yrs.
The reform lines up with a G-20 agreement. The European Union (EU) has gone further, setting in law specific limits for cash elements of compensation.
Only the United States has a solid new government process; other than bankruptcy or more bailouts for dealing with large financial firms in distress.
Known as orderly liquidation, it was part of the Dodd-Frank reforms. Critics say it will not work, while proponents argue it is a viable strategy for ending the problem of “too big to fail.”
US regulators are still finalizing a related rule on tagging some large firms as “systemic risks” to stability and subject to tougher oversight under Dodd-Frank. Insurers, mutual funds and hedge funds are trying to dodge the label, which will not officially be applied until later this year at the earliest.
The G-20 has only recommendations in this area, and hopes to approve some measures by the end of Y 2011, which could be introduced over several years. The EU has outlined plans, and will propose a draft law later this year.
A Worldwide push is under way to redirect much of the Over-The-Counter market for derivatives through exchanges and central clearinghouses, with stronger capital buffers.
The G-20 wants standardized contracts trading on exchanges or electronic platforms and centrally cleared by the end of Y 2012. The EU has a draft law to implement the G-20 pledges.
Reforms along these lines are being implemented by the US Commodity Futures Trading Commission, (CFTC) which has 1st drafts of all the major rules.
The Securities and Exchange Commission (SEC) has created parallel reforms for security-based derivatives.
Delays and congressional threats to throttle the agencies’ funding have slowed their work. The CFTC currently expects to finalize most of its rules before Y 2012.
The Volcker Rule, named after former US Federal Reserve Chairman Paul Volcker, bans banks from trading for their own profit in securities, derivatives and certain other financial instruments.
An initial proposal is expected this Summer, with a final rule due by October.
Banks such as Goldman Sachs have already shut down their stand-alone proprietary trading desks since Dodd-Frank was enacted, but regulators have yet to define what trading is still permissible.
The Key question is what will define trades that are intended to make a market for a client, a revenue-rich business that banks are not eager to see curtailed.
Foreign regulators have not introduced a similar restrictions, raising concerns that US firms will be put at a competitive disadvantage and the business will be up for grabs outside the US.
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red Roadmaster’s Technical Report on the US Major Market Indices, a weekly, highly-regarded financial market letter, read by opinion makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and stock markets since 1984, following a successful business career that included investment banking, and market and business analysis. He is a specialist in equities/commodities, and an accomplished chart reader who advises technicians with regard to Major Indices Resistance/Support Levels.