Regulatory Topics Dodd Frank Act


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Highlights of the Dodd-Frank Act - Reg Q & FDIC Assessments

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  • OUR VULNERABLE FAULT LINES Tripped Up At The Finish Line: The Perils Of Unemployment After 50 America's Economic Policy After Japan Crisis New Bill Would Ban Discrimination Against The Jobless Nuclear Safety Debate Hits Stock Prices House Republicans Amplify Attacks On Elizabeth Warren, Consumer Protection Automakers Extend Factory Shutdowns In Japan CHART: When A College Education Doesn't Help The Obama Administration's Plan To Punish Banks Dollar Close To Lowest Value Since WWII Dennis Santiago CEO and Managing Director of IRA Posted: March 16, 2011 01:37 PM BIO Become a Fan Get Email Alerts Bloggers' Index FDIC Bank Assessments Change on April 1st As Dodd-Frank Comes to Banking Inspiring Greedy Typical Scary Outrageous Amazing Innovative Infuriating Read More: Bank Regulation , Banks , Dennis Santiago , Dodd-Frank Act , Fdic , Institutional Risk Analytics , Business News share this story 1 35 1 1 Get Business Alerts Sign Up Submit this story digg reddit stumble The Federal Deposit Insurance Corporation (FDIC) is the buck stops here office of U.S. bank regulation. Chairman Sheila Bair and company are the checkbook behind the sign on every bank's door sign guaranteeing that your deposit is FDIC insured. Funding America's Deposit Insurance Fund (DIF) is done by charging banks an insurance premium. It's this cash paid by the banks themselves that is supposed to maintain the DIF's reserve. Come April 1st the rules for how banks get charged will be changing dramatically. The FDIC approved 2011 Final Rule changes to 12 CFR 327. The rule is effective April 1, 2011, and will be reflected in the June 30, 2011 fund balance and the invoices for assessments due September 30, 2011. The final rule incorporates many policy changes based on the intent of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The most important change of all is in something called the "base assessment amount". In the past this number was -- and until March 30th is -- the domestic deposits held by a bank. But as Dodd-Frank recognizes, banks have become more complex and leveraged. Most importantly, since the demise of Glass-Steagal, many of the larger institutions have incorporated the complexities of investment banking into their business models. The FDIC assessment methodology essentially gave a free ride to these aspects of a bank's operations. Well come April Fool's Day, the free ride is over. The "base assessment amount" changes to a new formula. From now on it's the bank's total assets minus its tangible common equity (TCE) that determines the base amount
  • Regulatory Topics Dodd Frank Act

    1. 1. Regulatory Topics: Dodd Frank Wall Street Reform & Consumer Protection Act Carol T. Adams, CTP Managing Principal
    2. 2. Regulatory Topics: Dodd-Frank Act <ul><li>By the 1830s, a few states enacted “free banking” laws to get away from the politicization and corruption involved in legislative chartering </li></ul><ul><li>After stops & starts, the Federal Reserve Act of 1914 became the centerpiece of banking legislation </li></ul><ul><li>Today, we have enough regulations to make an alphabet soup from the letters “A to FF” </li></ul>
    3. 3. Regulatory Topics: Dodd-Frank Act <ul><li>The Dodd-Frank Act has its roots in 1933’s Glass-Steagall Act </li></ul><ul><li>It’s estimated that the Repeal of Regulation Q alone will put $21 billion of bank profits at risk </li></ul><ul><li>There are over 500 new rules to cover things not resolved by the legislation itself, written by 11 agencies </li></ul><ul><li>The legislation’s printed 2,300 pages weighs in at six pounds </li></ul>
    4. 4. Dodd-Frank Wall Street Reform & Consumer Protection Act <ul><li>Goal - </li></ul><ul><li>Create a Sound Economic Foundation to Grow Jobs </li></ul><ul><li>Protect Consumers </li></ul><ul><li>Rein in Wall Street and Big Bonuses </li></ul><ul><li>End Bailouts and Too Big to Fail </li></ul><ul><li>Prevent Another Financial Crisis </li></ul>
    5. 5. Highlights: Dodd-Frank Act <ul><li>Consumer Protections with Authority and Independence </li></ul><ul><ul><li>Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices. </li></ul></ul>
    6. 6. Highlights: Dodd-Frank Act <ul><li>Ends Too Big to Fail Bailouts </li></ul><ul><ul><li>Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses. </li></ul></ul>
    7. 7. Highlights: Dodd-Frank Act <ul><li>Advance Warning System </li></ul><ul><ul><li>Creates a council to identify and address systemic risks posed by large, complex companies, products, and activities before they threaten the stability of the economy. </li></ul></ul><ul><li>Transparency & Accountability for Exotic Instruments </li></ul><ul><ul><li>Eliminates loopholes that allow risky and abusive practices to go on unnoticed and unregulated -- including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders. </li></ul></ul>
    8. 8. Highlights: Dodd-Frank Act <ul><li>Protects Investors </li></ul><ul><ul><li>Provides tough new rules for transparency and accountability for credit rating agencies to protect investors and businesses. </li></ul></ul><ul><li>Enforces Regulations on the Books </li></ul><ul><ul><li>Strengthens oversight and empowers regulators to aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefits special interests at the expense of American families and businesses </li></ul></ul>
    9. 9. Highlights: Dodd-Frank Act <ul><li>Executive Compensation and Corporate Governance </li></ul><ul><ul><li>Provides shareholders with a say on pay and corporate affairs with a non-binding vote on executive compensation and golden parachutes. </li></ul></ul>
    10. 10. Buh-Bye Reg Q (for real) <ul><li>R.I.P. Reg Q – July 21, 2011 </li></ul><ul><li>Strategically circumvented for years, banks can legally pay interest on demand deposit business checking for the first time in 75 years </li></ul><ul><li>No double-dipping -- Corporations choose: </li></ul><ul><ul><li>FDIC coverage of $250,000 on interest-bearing balances </li></ul></ul><ul><ul><li>Full FDIC coverage on non-interest bearing balances </li></ul></ul>
    11. 11. Impacted Commercial Banking Products & Services <ul><li>Checking </li></ul><ul><li>Over-the-counter derivatives </li></ul><ul><li>Investment Sweeps </li></ul><ul><li>Earnings Credit Rate </li></ul><ul><li>Other Cash Management Services </li></ul><ul><li>Account analysis statements </li></ul>
    12. 12. Buh-Bye Reg Q: Customer Postures <ul><li>“ A virtual non-event – not changing what we’re doing in the near future.” </li></ul><ul><li>“ This may make leaving money at the bank more appealing than transferring to money market funds.” </li></ul><ul><li>“ We’re going with the best overall deal that makes sense for our </li></ul><ul><li>bottom-line.” </li></ul><ul><li>“ Our sweep structure is too embedded in what we’re doing to change it.” </li></ul><ul><li>“ We’re going to balance interest earnings vs. ECR and determine what is best for now.” </li></ul>
    13. 13. Customer Perspectives <ul><li>Assessing Impacts – </li></ul><ul><li>Discussing Reg Q with Bankers & Fund Managers </li></ul><ul><li>Tracking FDIC fees to get a baseline </li></ul><ul><li>Examining rate scenarios to see where portfolios may be re-balanced </li></ul><ul><li>Determining whether ZBAs, Investment Sweep, and Cash Concentration products still make sense </li></ul><ul><li>Sizing up instrument mix </li></ul><ul><li>Understanding counterparty risk tolerances </li></ul><ul><li>Worrying about the trickling down of costs </li></ul>
    14. 14. Bank Perspectives <ul><li>Assessing Impacts – </li></ul><ul><li>Concerned about profits (commercial’s 80/20 rule) </li></ul><ul><li>Mix of balance sheet funding </li></ul><ul><li>Modeling the money </li></ul><ul><ul><li>Interest expense could be a moot point, given sweep rates </li></ul></ul><ul><ul><li>Exposure for lost non-interest revenue, as businesses exit sweep products for vanilla interest checking </li></ul></ul><ul><ul><li>Higher cost of funds </li></ul></ul>
    15. 15. Bank Perspectives <ul><li>Assessing Impacts – </li></ul><ul><li>Understanding the best customer mix to attract/retain </li></ul><ul><li>Identifying system limitations to applying, tiering, and managing interest rates by product </li></ul><ul><li>Sizing up the competition, including fund companies </li></ul>
    16. 16. Bank Perspectives <ul><li>Assessing Opportunities – </li></ul><ul><li>Building knowledge on the sensitivities of their customer base </li></ul><ul><li>Testing products, e.g. hybrid checking which pays interest on balances above the level to compensate for service fees </li></ul><ul><li>Getting a leg up on the competition, especially community banks eyeing “big boy bank” customers </li></ul>
    17. 17. Key Questions <ul><li>How and which customers will be impacted most? </li></ul><ul><li>What is the most effective way to comply with new regulation? </li></ul><ul><li>Who are the key internal stakeholders needed to collaborate and execute? </li></ul><ul><li>What other sources of revenue exist to compensate for any negative effects of the regulation? </li></ul><ul><li>When will you execute your plan? </li></ul>
    18. 18. Dodd-Frank: FDIC Assessments <ul><li>Effective April 1, 2011 and reflected on June 30 th invoices due in September. </li></ul><ul><li>“ Base assessment amount” was based on domestic deposits – now it will be: </li></ul><ul><ul><li>Banks Total Assets minus Tangible Common Equity </li></ul></ul><ul><li>The bigger the assets, the more the increase – small & community banks not as impacted as “big boy banks” </li></ul>
    19. 19. Regulatory Topics: On the Horizon <ul><li>Dodd-Frank Act directed the FDIC to study how core & brokered deposits are defined, their role in the economy and whether they should be reclassified relative to stability or volatility. Roundtable on March 18 th , with comments collected through May 1 st . </li></ul><ul><li>Compelling testimony was given on March 7 th by ICBA on the impacts of Dodd-Frank on community banks </li></ul><ul><li>As many as 300 regulations are to be issued during the next five years. Each will be published in draft form and put out for public comment. </li></ul>
    20. 20. Sources Cited <ul><li>Dodd-Frank Regulatory Calendar – </li></ul><ul><li>FDIC’s Official Site on Dodd-Frank – </li></ul><ul><li> </li></ul><ul><li>On the Horizon – </li></ul><ul><li> </li></ul>
    21. 21. For More Information Carol T. Adams, CTP Managing Principal [email_address]