1. Dodd-Frank Act: What Are Its Key Features, How Much Progress Has Been Made on Implementation, and Will It Improve the Financial System
James R. Barth (Auburn University and Milken Institute), Penny Prabha (Milken Institute)
Clas Wihlborg (Chapman University)
The 89th Western Economic Association Annual Conference
June 27- July 1, 2014
Grand Hyatt Denver, Colorado

2. Outline Introduction Historical Perspective on Dodd-Frank
Dodd-Frank’s main goal: to strengthen and expand the scope of regulatory powers so that regulators are better able to intervene in a timelier manner when troublesome situations arise.
Historical Perspective on Dodd-Frank
Key Features and Implementation Progress of Dodd-Frank
An Assessment of Dodd-Frank

3. An Historical Perspective on the Dodd-Frank Act
Timeline of major banking laws
Source: Milken Institute.

4. New financial regulatory structure
Source: Milken Institute.

5. Key Features and Implementation Progress
Regulatory Capital Standards
Consumer Protections
Financial Stability Oversight Council
A New Resolution Process
Prohibition of Propriety Trading
Derivative Instruments
Shareholders and Executive Compensation
Credit Rating Agencies
Securitization
Federal Reserve Emergency Lending Authority

6. Implementation Progress: Percentage of Rulemakings Finalized
Note: There are the 398 Total Required Rulemakings. The information are as of June 2014.
Source: Dodd-Frank Progress Reports, Davis Polk

7. Implementation Progress: Select Categories
Note: There are the 398 Total Required Rulemakings. The information are as of June 2014.
Source: Dodd-Frank Progress Reports, Davis Polk

8. Assessment Assessment based on the following factors:
Will Dodd-Frank reduce the likelihood of “regulatory failure”?
Will Dodd-Frank increase or reduce “regulatory burden”?
Will Dodd-Frank increase market discipline?
Will Dodd-Frank contribute to efficiency and stability in the financial system?
No actions taken with respect to Fannie Mae and Freddie Mac

9. 1. Regulatory Capital Standards
Assessment
Important feature – likely to address a FI’s contribution to systemic risk
Emphasis on risk-based capital requirements vs. a simple leverage requirement
Risk-taking behavior associated with a bank’s business model (such as wholesale funding)
Goal
To ensure a safer and sounder banking system
Key Features
Minimum leverage and risk-based capital requirements
Stress testing conducted on large FIs (a bank with assets > $50b)
Maximum 15-to-1 leverage ratio
“Prompt corrective action”

10. Capital ratios in the quarter prior to first receiving bailout funds (in most cases, the data are as of Q3 2008).
Sources: Bloomberg, Milken Institute.

11. 2. Consumer Protections Assessment Goal Key Features
Important feature – likely to reduce the likelihood of regulatory failures
Does the success of the Bureau mean an increase in the regulatory burden for banks?
Expansion of DI may decrease effective market discipline and may lead to greater systemic instability.
Goal
Protect consumers from abusive practices by FI’s.
Key Features
Creates a Bureau of Consumer Financial Protection
Imposes minimum standards for residential mortgage loans
Allow states to impose stricter consumer laws on national banks
Deposit insurance raised to $250,000

12. 3. Financial Stability Oversight Council
Assessment
Important feature – likely to reduce the likelihood of regulatory failure
Political factors – will appropriate action be taken against insolvencies?
Standardization of risk measurement – a proper way to evaluate risk?
Does reference to “systemically important” FIs imply that these FIs are TBTF (and would be bailed out if they face financial difficult)?
Goal
Identify risks to U.S. financial stability and address them through appropriate regulatory agencies
Key Features
Designates SIFIs and assesses risks posed by them (banks and non-banks)
Establishes the Office of Financial Research to support the duties of FSOC
Recommends prudential capital standards

13. Combined assets of the 50 biggest bank holding companies
Sources: The Banker, Federal Reserve, the U.S. Bureau of Economic Analysis, and Milken Institute.

14. 4. A New Resolution Process (Orderly Liquidation Authority)
Assessment
Important feature – likely to increase market discipline
Its effectiveness depends on the credibility of no bailout policy.
Goal
Mitigate moral hazard and systemic risk
Key Features
Orderly Liquidation Authority – to liquidate failing BHCs
FDIC as a receiver and runs liquidation process

15. BHCs with assets > $50 billion
Bank
Total Assets
(12/31/2013)
Participated in the 2014 Dodd-Frank Act stress test
G-SIBs identified by FSB 1
JPMorgan Chase & Co.
$2,416  2
Bank Of America Corporation
$2,105 3
Citigroup Inc.
$1,880 4
Wells Fargo & Company
$1,527 5
Goldman Sachs Group, Inc.
$912 6
Morgan Stanley
$833 7
American International Group, Inc.
$541 8
General Electric Capital Corporation
$524 9
Bank of New York Mellon Corporation
$374 10
U.S. Bancorp
$364 11
PNC Financial Services Group, Inc.
$321 12
Capital One Financial Corporation
$297 13
HSBC North America Holdings Inc.
$290 14
Teachers Insurance & Annuity Association of America
$250 15
State Street Corporation
$243 16
TD Bank US Holding Company
$235 17
BB&T Corporation
$183 18
SunTrust Banks, Inc.
$175 19
American Express Company
$153 20
Ally Financial Inc.
$151

16. BHCs with assets > $50 billion (cont.)
Bank
Total Assets
(12/31/2013)
Participated in the 2014 Dodd-Frank Act stress test
G-SIBs identified by FSB 21
Charles Schwab Corporation
$144 22
Fifth Third Bancorp
$130  23
State Farm Mutual Automobile Insurance
$129 24
United Services Automobile Association
$122 25
RBS Citizens Financial Group, Inc. 26
Regions Financial Corporation
$118 27
BMO Financial Corp.
$111 28
UnionBanCal Corporation
$106 29
Northern Trust Corporation
$103 30
KeyCorp
$93 31
M&T Bank Corporation
$85 32
BancWest Corporation
$84 33
Discover Financial Services
$79 34
Santander Holdings USA, Inc.
$77 35
BBVA Compass Bancshares, Inc.
$72 36
Deutsche Bank Trust Corporation
$67 37
Comerica Incorporated
$65 38
Huntington Bancshares Incorporated
$59 39
Zions Bancorporation
$56

17. 5. Prohibition of Propriety Trading (Volcker Rule)
Assessment
Modest contribution to financial stability
No strong evidence that propriety trading caused the crisis (no banks’ ownership of hedge funds)
Difficult to implement
Requires that the implicit protection on non-traditional banking activities must be credibly removed.
Goal
To separate financial intermediation functions from the presumed more speculative business
Key Features
Not allow proprietary trading
Restrict bank ownership in hedge funds and private equity funds

18. 6. Derivative Instruments
Assessment
Important feature – likely to increase financial stability, but the net impact is unclear.
Centralized trading platforms or poorly managed clearinghouses may increase systemic risks.
Goal
To increase transparency and reduce counterparty risk of OTC derivatives
Key Features
Mandatory clearing
Mandatory trade execution
Minimum capital and margin requirements for swap dealers and major swap participants
Derivatives for hedging purposes exempted

19. 7. Shareholders and Executive Compensation
Assessment
Modest contribution to financial stability
Reduces risk-taking decisions on the part of managers, but limits on pay may compromise the ability of financial firms to attract the best talent.
Goal
To place limits on the level and form of executive pay in the banking sector
Key Features
Provides shareholders with a nonbinding vote on executive pay
Gives SEC authority to grant shareholders the ability to nominate their own directors

20. 8. Credit Rating Agencies
Assessment
The net impact is unclear
This regulation makes the rating agencies more careful in their assessments.
Burdens may fall on small credit rating agencies (and make the 3 major CRAs more important).
Goal
To reduce regulatory reliance on credit rating agencies (and therefore to reduce a bias towards high credit ratings)
Key Features
Establishes the Office of Credit Ratings within the SEC
Empowers the SEC to deregister a CRA that fails to provide accurate ratings
Allows investors to sue CRAs
Disclosure requirements

21. 9. Securitization Assessment Goal Key Features
Important feature – likely to increase financial stability
Unintended consequence? Given that securitization helps increase lending capacity of FIs and therefore economic performance
Goal
To increase banks’ incentive to screen and monitor the loans (if they were required to hold a portion of the securitized loans)
Key Features
Requires banks that packaged loans to keep 5% of credit risk on their balance sheet
Low-risk residential mortgages exempted

22. 10. Federal Reserve Emergency Lending Authority
Assessment
Important feature – likely to reduce the likelihood of regulatory failures
Waiting for an approval by the Secretary of Treasury to supply liquidity can be costly at the time of financial distress.
Full disclosure requirements may discourage weak banks from obtaining liquidity assistance.
Goal
To protect taxpayers from losses when the Fed provides financial assistance to a FI
Key Features
Establishes policies and procedures to ensure that the lending program is to provide liquidity, and not to bail an insolvent FI
Increases Fed transparency