Dodd-Frank Financial Reform After Two Years

7/31/2019 Dodd-Frank Financial Reform After Two Years

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1 Center or American Progress | Dodd-Frank Financial Reorm Ater Two Years

Dodd-Frank Financial Reform

After Two Years5 Successes and 5 Things That Will Make

Our Markets Stronger

Jennifer Erickson, Tamara Fucile, and David J. Lutton July 20, 2012

Introduction

Srong and sable capial markes are criical o Americas economic success. Te U.S.

nancial secor is he larges in he world and is one o he pillars o our economy. Bu

he 2008 nancial crisis also laid bare weaknesses in he secorweaknesses ha had

severe consequences or American workers and heir amilies. Millions o Americans

los heir jobs and $17 rillion in household wealh was desroyed.1 On a more personal

scale, he average ne worh or American households dropped rom $126,400 in 2007

o $77,300 in 2010 aer he nancial crisis,2 wiping ou almos wo decades o gains and

dramaically weakening he middle class ha is so crucial o economic growh.

wo years ago his week, in response o he nancial crisis, Congress passed landmarkreorm o srenghen he U.S. nancial secor and proec axpayers rom a repea o he

2008 crisis. Te Dodd-Frank Wall Sree Reorm and Consumer Proecion Ac was he

mos sweeping legislaive reorm in he nancial secor since he passage o Presiden

Franklin D. Roosevels suie o reorms in he 1930s. Bu passing Dodd-Frank hrough

Congress was simply he rs sep in a process o shoring up he nancial sysem ha con-

inues o his day, wih criical decisions sill o come in he monhs and years ahead, boh

o implemen his key law, and also o ensure he nancial secor is serving he economy.

Dodd-Frank gave regulaors key new ools and a mandae o do a dicul job. Par o he

challenge is echnical: o use hose ools, regulaors mus creae and implemen specic

rules designed o make markes saer, keep our companies compeiive, and proec U.S.

axpayers and consumers. Bu par o he challenge is also poliical: ensuring ha opponens

who have sough o weaken and delay key measures do no ulimaely shelve progress.

wo years aer Presiden Barack Obama signed Dodd-Frank ino law, we have seen

some noable successes. Our nancial markes are sronger han hey were beore he


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crisis, and Americans can coun on beter consumer nance proecion in heir day-o-

day ineracions wih nancial services insiuions.

Tis issue brie presens ve concree ways ha our nancial markes are sronger oday

han wo years ago alongside ve concree hings ha can be done o make hem even

sronger. Specically, here are ve ways nancial reorm has srenghened our markes:

A consumer wachdog is now on he bea. Every nancial insiuion now mus play by he rules. Increased capial requiremens are now in place.A new resoluion auhoriy or ailing nancial insiuions now exiss. New rules will help rein in execuive compensaion.

Ye we also know ha in any ask his big here is sill more o be done. While his is no

an exhausive lis, here are ve concree hings ha can be done o make our markes

even sronger:

Implemen he Volcker Rule o proec axpayers rom excessive risk-aking by nan-

cial insiuions. Finalize derivaives reorm o proec our markes rom overspeculaion in his

hundred-rillion-dollar marke. Ensure nancial regulaors have he resources o proec axpayers by adequaely und-

ing he Commodiy Fuures rading Commission. Hold he line on morgage originaion and securiizaion o proec homeowners,

invesors and axpayers. Coninue o ensure coordinaed global nancial reorm and srong inernaional mini-

mum capial sandards are enaced.

So les delve ino he deails o Dodd-Frank wo years on wih much sill o accomplish.

Five ways financial reform has strengthened our markets

A consumer watchdog is now on the beat

I we had had his agency six years ago, eigh years ago, we would no be in he mess we

are oday.

Elizabeth Warren, testifying before House Financial Services subcommittee,

March 16, 20113

Perhaps he mos visible and immediae resul o he Dodd-Frank Ac has been he esab-

lishmen o he Consumer Financial Proecion Bureau, which was creaed o proec con-


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size rom small eniies, such as payday lenders or check cashing oules, o massive oo big

o ail insiuions, such as Wall Sree invesmen banks and global insurance companies.

Wih he collapse o large nonbanks such as American Inernaional Group, Inc. and

Lehman Brohers, i became clear ha hese rms needed much beter regulaion o

keep hem rom dragging down he economy. Similarly, in he wake o he nancial

crisis i became abundanly clear ha some small morgage-nance brokerages wereabusing prudenial underwriing pracices and placing many homebuyers in expensive

and unsusainable loans.9

Dodd-Frank creaed he Financial Sabiliy Oversigh Council o monior sysemic risk

in he nancial sysem and coordinae several ederal nancial regulaors. Te council

is empowered o ideniy sysemically imporan bank and nonbank nancial insiu-

ions, he ailure o which migh pose a risk o he U.S. economy. Tese insiuions are

subjec o cenralized regulaory oversigh by he Federal Reserve, which is auhorized

o implemen checks including limis on he amoun o deb hey can carry, enhanced

capial sandards o boos he amoun o equiy capial hey hold, and resricions romcerain ype o risky aciviies.

Te Financial Sabiliy Oversigh Council issued is nal rule on sysemically imporan

nancial insiuions in April 2012.Nonbank nancial insiuions will be designaed

sysemically imporan i hey have oal asses o more han $50 billion and mee one

o ve hresholds relaing o credi deaul swaps, ousanding deb, derivaives, leverage

raio, and shor-erm deb.10 In July 2012, he council designaed eigh nancial clearing-

houses as sysemically imporan.11 Tese so-called nancial marke uiliies are he rs

phase; i is expeced ha anoher hree o our large nonbank nancial insiuions will

be designaed beore he end o 2012.12

In he area o consumer nancial producs, small nonbanks were also largely ouside o

srong regulaory scruiny. In January 2012 he Consumer Finance Proecion Bureau

ook over he supervision o smaller nonbank companies ha provide consumer nan-

cial producs or services, including morgage brokers and payday loan companies.13 By

requiring he bureau o examine nonbanks, Dodd-Frank helps ensure ha consumers

ge he bene o ederal consumer nancial laws on a consisen basis.

Increased capital requirements are now in place

Te longer I augh and wroe in he area o nancial regulaion, he more convinced I

became o he cenraliy o srong capial sandards o a sound nancial sysem.

Federal Reserve Governor Dan Tarullo, June 6, 2012 14

Capial requiremens are designed o decrease he probabiliy o a nancial insiuion

ailing by deermining he ype o capial hey need o hold in reserve. Generally, hese


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requiremens increase he use o equiy (socks) as a unding source or nancial rms,

so ha i a rm ges ino diculies i is he shareholders and no he axpayers ha pick

up he bill. Bu he 2008 nancial crisis exposed he inadequacy o exising capial regu-

laions as many nancial insiuions were vasly overleveraged and hereore unable o

wihsand nancial disress. When Lehman Brohers ailed, i had $1 in equiy or every

$30 i was borrowing.15

Dodd-Frank has no only direced regulaors o increase minimum-capial requiremens,

bu has also placed greaer emphasis on he ypes o capial ha qualiy. Bank holding

companies and nonbank nancial insiuions wih asses o a leas $50 billion are now

subjec o greaer regulaory oversigh by he Federal Reserve, which can impose addi-

ional capial requiremens on hese insiuions. Te Federal Reserve is in he process o

adoping rules, agreed a he global level, o urher raise capial over he coming years.

Dodd-Frank also mandaed he Federal Reserve o carry ou annual sress ess on all

banks wih $50 billion or more o deermine i hey have he capial needed o absorb

losses under various scenarios. Te Federal Reserve has carried ou hree sress ess soar, wih he laes resuls in March 2012 showing ha 15 o he 19 larges nancial rms

operaing in he Unied Saes have enough capial o wihsand a severe recession.16

Tis refeced a signican increase in capial since he 2009 es, when 10 o he banks

were ound o have insucien capial o wihsand anoher crisis.17

Increased capial requiremens and sress esing help make our nancial sysem more

resilien o economic shocks and uure nancial crises. Tis is criically imporan given

coninued nancial marke problems in Europe, which have creaed uncerainy and

volailiy in global markes.

A new resolution authority for failing financial institutions now exists

In summary, he measures auhorized under he Dodd-Frank Ac o creae a new, more eecive

SIFI [sysemically Imporan Financial insiuions] resoluion auhoriy will go ar oward

reducing leverage and risk-aking in our nancial sysem by subjecing every nancial insiuion,

no mater is size or degree o inerconnecedness, o he discipline o he markeplace.

Sheila C. Bair, former chair of the FDIC, testimony before the House Subcommittee

on Financial Institutions and Consumer Credit, May 26, 201118

Te collapse o Lehman Brohers and he near collapse o global insurer American

Inernaional Group and Wall Sree invesmen bank Bear Serns highlighed he need

or a resoluion process ha would allow he wind-down o sysemically imporan

nonbank nancial insiuions wihou he need or axpayer backed bailous. Te new

resoluion auhoriy rules mandaed in Dodd-Frank atemp o end his problem o oo


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big o ail and ensure U.S. axpayers will no longer be asked o bail ou ailing banks and

oher nondeposiary insiuions.

While he Federal Deposi Insurance Corporaion is radiionally in charge o winding

down ailing deposiory banks, oher nonbank nancial insiuions have been subjec o

he normal bankrupcy process. Bu bankrupcy is unsuiable or large nancial insiu-

ions ha are sysemically imporan or a variey o reasons, especially because bank-rupcy is no designed o keep credi fowing in he broader economy.

Dodd-Frank gives he Federal Deposi Insurance Corporaion auhoriy o wind down

bank holding companies and nonbank nancial insiuions whose ailure would be

poenially damaging o he U.S. economy and nancial sabiliy. Resoluion mehods

include selling asses and paying o deposiors as well as he ranser o deposis o

healhy banks. Under he process, managemen is red and shareholders bear he losses.

Anoher key ool is he requiremen or large banks and nonbank nancial insiuions

o do advance preparaion or ailure by submiting plans o regulaors. Tese so calledliving wills help prepare he insiuions and regulaors or a rapid and orderly wind-

down in he even o nancial disress.

Nine o he larges U.S. banks and he U.S. unis o oreign banks wih more han $50

billion in asses or more han $250 billion in nonbank asses, such as derivaives, sub-

mited heir plans o regulaors on July 2, 2012.19 Te Federal Reserve esimaes ha

124 insiuions, including dozens o oreign banks, will need o submi living wills by

he end o 2013.20 I regulaors believe ha he resoluion plans are no credible, Dodd-

Frank gives hem he auhoriy o make he banks sell o business lines and resrucure

o become less complex.21

Te graning o his resoluion auhoriy and he draing ocredible living wills provides increased visibiliy ino complex insiuions and helps

ensure ha corporaions have he abiliy o wind down, under he supervision o regula-

ors, in a way ha minimizes he damage o axpayers and he economy.

New rules will help rein in executive compensation

In he hal a dozen nancial insiuions ha needed help he mos during he crisis, ha were

oo big o ail he managers which led hem ino he rouble in all cases wen away very,

very wealhy.

Warren Buffett, March 25, 201122

Public anger over rapidly escalaing pay or corporae execuives, regardless o heir

rms perormance, led o he inclusion o several execuive compensaion provisions in

he Dodd-Frank Ac. Tese include requiring corporaions o repor he raio o CEO

o average worker pay and a measure o resric pay a banks so as no o encourage and


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reward excessive risk aking. Regulaors coninue o work hrough many o hese impor-

an rules, bu one noable provision already in aec is say-on-pay, which requires all

publicly raded companies o submi heir execuive compensaion plans o shareholder

voes a leas once every hree years.

While hese voes are non-binding, indusry analyss agree ha hey are already having

a signican impac on corporae compensaion pracices, as companies are aking hesevoes seriously.23 Alhough a very small number o companies (less han 2 percen) 24

have acually ailed heir say-on-pay voes since he acs implemenaion, rms have

begun resrucuring execuive compensaion packages o avoid embarrassing voes. Case

in poin: Aer is ailed voe in 2011, Hewlet-Packard Co. eliminaed is compensaion

ormula ha allowed he CEO o earn millions despie alling share prices.25

While shareholder disapprovals remain uncommon, he impac o say-on-pay voes and

he poenial negaive atenion ha accompanies hem has resuled in a shi in indusry

pracices ha or oo long allowed execuive compensaion o go unchecked.

Five things that will make markets stronger if we finish the job

Implement the Volcker Rule to protect taxpayers from excessive risk taking

by financial institutions

Banks beneing fom public suppor by means o access o he Federal Reserve and FDIC insur-

ance should no engage in essenially speculaive aciviy unrelaed o essenial bank services.

Five former secretaries of the Treasury: Michael Blumenthal, Nicholas Brady, PaulONeill, George Shultz and John Snow, in a letter to the Wall Street Journal, February

21, 201026

Te Volcker Rule, named aer ormer Federal Reserve Chairman Paul Volcker, prohibis

ederally insured banks and heir aliaes rom engaging in proprieary rading, dened

as when a bank buys and sells cerain invesmens or is own pro, insead o is cliens.

Proprieary rading can add signican risk o banks. Firs, i could pu a bank in a

confic o ineres wih cliens. In he years leading up o he 2008 nancial crisis, or

example, some banks sold producs o cliens while a he same ime heir prop desk

ook posiions on he opposie side o he same deal.

Second, i banks are rading wih heir own money hen hey run he risk o losing ha

money. I hese speculaive invesmens urn bad, and i he losses are subsanial enough,

hen he ederal governmenand he axpayermay have o sep in o bail ou he bank.


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In boh cases, proprieary rading creaes a culure o risk aking, which because o he

imporance o banks and oher sysemically signican nancial insiuions, pus he

enire nancial sysem a risk. JPMorgan Chase & Co.s recen mulibillion-dollar loss

highlighed he need or a srong Volcker Rule27one no weakened by proprieary

rading masked as hedging he banks overall risk .

During he Senae Banking Commitee hearing ino wha wen wrong a JP Morgan,Sen. Je Merkley (D-OR) poined ou: he basic concep o he Volcker rule is ha

banks are in he lending business, no he hedge und business.28 In May o his year,

Presiden Obama underlined he imporance o he Volcker Rule o ensure ha axpay-

ers are no again orced o bail ou a bank because o risky bes.29

Te nal Volcker Rule is due o be published in July 2012, hough i is likely he deadline

will be missed as regulaors work o ge he nal rule righ.30 Boh clariy and imeliness

are imporan in making sure ha he axpayers are proeced rom excessive risk.

Finalize derivatives reform to protect our markets from overspeculation in this

hundred-trillion-dollar market

Among he causes o he nancial crisis was Wall Srees use o exraordinarily complex

derivaivesnancial insrumens ha derive heir value fom oher nancial insrumens.

Tese derivaives were largely shielded fom scruiny in an opaque markeplace.

Sen. Carl Levin (D-MI) on Wall Street reform31

Derivaives are nancial insrumens whose value is derived rom some underlying secu-

riy or commodiy. Derivaives have exised or cenuries, and he uures and commodi-ies markes in, say, corn or pork bellies have been regulaed since he 1930s, bu he

rapid growh in oen complex and opaque derivaives led Warren Buet o amously

describe hem as nancial weapons o mass desrucion.32

Derivaives such as nancial uures, opions, and swaps involving ineres raes or credi

deauls were developed o allow invesors o hedge risks in nancial markesbu

quickly become a means o invesmen in heir own righ. Tis global marke grew rom

$88 rillion in 1999 o $684 rillion beore he crisis in 2008.33

Leading up o he 2008 crisis, large nancial insiuions bough and sold rillions o dol-

lars o over-he-couner swaps, meaning he rades were unregulaed and ouside he over-

sigh o regulaors. Alhough derivaives can play an imporan role allowing companies

such as airlines o manage risk, a lo o he rading amouned o litle more han speculaive

bes or prooen wih an inadequae level o capial o back up he rades.


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Reorming he derivaives marke became an imporan ocus o regulaory reorm aer

he 2008 nancial crisis because o he role derivaivescredi deaul swaps speci-

callyplayed in he ailure o American Inernaional Group, which required a bailou

cosing U.S. axpayers $182 billion.34 AIGs London aliae, AIG Financial Producs, sold

billions in swaps wihou having o place capial o back up hose bes. When he Briish

uni o AIG ailed in London, is U.S. paren had o be rescued by he U.S. axpayers.35

Dodd-Franks ile VII provisions signicanly increase he mandae o he Commodiy

Fuures rading Commission o bring greaer regulaory oversigh and ransparency

o derivaives. Te rules are deailed and highly echnical, hough broadly will have he

eec o requiring mos derivaives o be raded on a regulaed exchange and cleared

hrough a cenral clearinghouse. Tis means a counerparya clearinghouse whose

main purpose is sabiliywill sand beween he buyer and seller and guaranee ha

each pary is able o make good on heir obligaions by collecing a proporion o he

value conrac, known as a margin.

Te exchanges are regulaed by he Commodiy Fuures rading Commission, givinghe regulaor much more inormaion abou he marke and allowing hem o beter

monior, and preven, he ype o excessive risk aking ha ulimaely led o he AIG

bailou. Derivaives will in he uure be raded hrough ransparen plaorms wih real-

ime pricing inormaion. Tis should creae a more ecien and compeiive marke-

place, ensuring ha end-users including Main Sree businesses and local governmen

can access he bes prices.

Much progress has already been made, and recenly he Commodiy Fuures rading

Commission and Securiies and Exchange Commission, which regulaes equiy and deb

markes, issued a deniion o he ype o swaps ha will be subjec o cenralized clearingand exchange rading. Tis is a major milesone as a number o rules he commission has

already nalizedsuch as new posiion limis, regisraion, real-ime reporing, business

conduc, and commodiy opions ruleswill go ino eec in a mater o weeks, now ha

he deniion is nalized.36 Boh nancial regulaory agencies have made a commimen o

compleing he rulemaking on ile VII by he end o 2012.

Ensure regulators have the resources to protect taxpayers by adequately funding

the Commodity Futures Trading Commission

Te CFCs success in uncovering he ourageous manipulaion o he Libor, and he

consequen setlemen which will bring o he U.S. reasury hundreds o millions o dollars,

demonsraes he value o ha agency. Te reusal by Republicans o mee he Obama admin-

israions reques or $308 million or he CFC, when he agency has helped bring ino he

reasury approximaely ha amoun in one successul prosecuion, demonsraes ha he

pary is driven no by concern or he deci bu raher by ideological rigidiy.

Rep. Barney Frank (D-MA), June 29, 201237


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Laws need enorcers. o proec markes and consumers requires boh sound regula-

ions and adequae resources or regulaors o see hem hrough.

Some nancial regulaory agencies, such as he Federal Reserve, Comproller o he

Currency, and he Federal Insurance Deposi Corporaion are independenly unded,

insulaing hem rom atemps o cu heir budges o he poin where hey can no lon-

ger do heir jobs. Te Securiies and Exchange Commission is unded by a small user eeon all equiies rading.

Te Commodiy Fuures rading Commission, however, relies enirely on he con-

gressional appropriaions process, making i vulnerable o parisan atemps o sarve

i o resources as i works o ulll is enhanced responsibiliies under Dodd-Frank.

Te House Appropriaions Commitee has repored o he foor a bill ha provides

only $180 million o he derivaives regulaor. Tis represens a cu o $25 million (12

percen) rom las years appropriaion, and is 41 percen below he agencys requesed

budge o $308 million.38

Tis cu would require he commission o cu sang back o levels prevailing in he

mid-1990s. Ye since hen he combined impac o he growh in he uures marke

and he new responsibiliies under Dodd-Frank means ha he marke he agency now

overseas is 40 imes o 50 imes larger39 and a noional value o $300 rillion.40

Te Commodiy Fuures rading Commissions wo-year invesigaion ino Barclays

rigging o he London Inerbank Oered Rae, known as Libor, demonsraes he

coninued need o make sure here are enough cops on he bea o ideniy and punish

nancial misconduc. Te setlemen ne o $200 million is almos equivalen o he

agencys enire 2012 budge o $205 million.41

Presiden Obamas 2013 budge atemps o address some o he budgeary concerns

around Dodd-Frank implemenaion by unding he Commodiy Fuures rading

Commission in par hrough user ees.42 In a join leter o Congress, organized by he

public advocacy group Americans or Financial Reorm, more han 50 consumer, labor,

aih-based, nongovernmen, and business organizaions gave heir suppor o a user ee

unding model.43

Tis is a sound idea, and one wih preceden as seen in similar regulaory agencies.

Hold the line on mortgage origination and securitization to protect homeowners,

investors, and taxpayers

Tere were oo many people in all o he uncional componen parsmorgage brokers, loan

originaors, loan securiizers, sub-prime lenders, Wall Sree invesmen bankers, and raing


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agencies--who were ineresed only in making heir own as pros and were indieren o he

consequences o heir acions or homeowners and communiies, much less he naion as a whole.

Federal Reserve Governor Sarah Bloom-Raskin, February 11, 2011 44

Te misalignmen o incenives hroughou he housing and housing nance marke lies

a he hear o he morgage crisis. Brokers go paid a he closing able, leaving hem no

incenive o underwrie borrowers careully. Lenders quickly fipped hose loans inohe secondary marke, leaving hem wih no exposure o shoddy morgages. Wall Sree

rms paid op dollar or he riskies loans o sell o insiuional invesors worldwide

who were looking or greaer reurns on heir invesmens, leading brokers and lenders

rom whom hey were buying he loans on a race o he botom in erms o originaion

and compensaion pracices. Tose invesmen banks, which never ook ownership o

he loans hemselves, hen sliced and diced he loans ino securiies, paid he raings

agencies o bless hem, and passed hem along o invesors who were oen misinormed

o he underlying risks.

In shor, every link in he producion chain was insulaed rom he consequences obad lending, leaving homeowners and invesors holding he bag when he bubble

burs. Dodd-Frank aims o realign hese marke incenives rom op o botom, hereby

enabling he marke o produce more susainable morgages or homeowners and saer

securiies or invesors.

o ensure beter morgage originaion, Dodd-Frank requires lenders o ensure home-

owners have he abiliy o repay heir morgages. As he Consumer Finance Proecion

Bureau works o delineae he conours o his requiremen by he end o 2012, i

is imporan or i o resis indusry pressure o waer down is so-called qualied

morgage sandard, which ses ou he underwriing crieria or he saes caegory omorgages and esablishes an appropriae sandard o legal review or ensuring ha he

crieria are ollowed.

Dodd-Frank also prohibis he perverse compensaion pracices ha drove many mor-

gage brokers o seer borrowers ino morgages more expensive han hose or which

hey qualied, paricularly in Arican-American and Laino communiies, and bans mos

prepaymen penalies. Te eecive implemenaion o hese provisions is also key o

prevening predaory lending in he uure.

On he securiizaion side, Dodd-Frank requires issuers o morgage-backed securiies o

reain 5 percen o he credi risk or each securiy issued, giving hose securiizers skin

in he game. One o he mos conroversial pars o his provision is he exempion o

qualied residenial morgages rom he risk reenion requiremen, and marke par-

icipans are anxiously awaiing a nal rule. A broadly dened qualied residenial mor-

gage will help ensure an opimum balance beween access o credi and accounabiliy.


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Continue to ensure coordinated global financial reform and strong international

minimum standards are enacted

We all have a muual responsibiliy o deliver on all our commimens o address he weak-

nesses ha led o he nancial crisis. Now is he ime or he Leaders o he G20 boh o recom-

mi hemselves and deliver on he ambiious reorm objecives and agenda we have already

agreed o and o explore cooperaive approaches o meeing our common goals.President Obama, open letter to the Group of 20, March 29, 2010 45

Te nancial crisis did no jus aec he Unied Saes. Financial sysems are inercon-

neced and risks are spread across naional borders. Recognizing his ac, global leaders

a he Group o 20 Washingon Summi in 2008 agreed o move oward inernaional

agreemen on basic nancial rules in order o ensure proecions are in place o shield

axpayers rom risks emerging rom abroad, as well as o mainain an open and healhy

inernaional nancial services secor.46

Te Unied Saes has led he way in seting he inernaional reorm agenda by over-hauling is nancial regulaion hrough Dodd-Frank. Working alongside parners in he

European Union and oher G-20 naions, here has been subsanial progress made on

exending he ramework or sysemically imporan nancial insiuions o domesic

banks and global insurance companies, and in preparing an inegraed se o recommen-

daions or more eecive oversigh and regulaion o derivaives markes.47

Te leaders o he G-20 naions agreed o coordinae global sandards in banking regula-

ion in order o srenghen inernaional nancial sabiliy. Te Basel III banking reorms

increase he minimum regulaory capial requiremen rom 2 percen o 7 percen, and

subjec globally sysemically imporan banks o a 1 percen o 2.5 percen surcharge.48

Alhough Basel III ses ou a global sandard, i is no legally binding as counries are

required o implemen he accords ino heir own laws.49 Te Collins Amendmen o

Dodd-Frank creaed he sauory basis or he implemenaion o Basel III in he Unied

Saes. In June 2012 he Federal Reserve proposed nal rules on a regulaory capial

ramework which incorporaes he inernaional Basel III sandards.50

Te Obama adminisraion is pushing hrough he G-20 process or more progress on

he global implemenaion o bank capial requiremens in oher markes, paricularly

Asia, on rules regarding over-he-couner derivaives, and on he orderly resoluion

(winding down) o ailing nancial insiuions.51

Creaing minimum inernaional rules is essenial o proec nancial sabiliy globally,

including U.S. economic growh, and o preserve he advanages o an open and globally

inegraed nancial sysem and economy. Wihou condence in he srengh o nan-


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cial insiuions and markes in oher counries, recen experience in Europe has shown

ha problems in one counry can spread rapidly.52A healhy global economy depends

upon a sable and inegraed global nancial sysem.

The benefits of Dodd-Frank financial reform

How the Dodd-Frank Act protects the interests o consumers, businesses, investors, and our economy

Our financial

markets

Before the financial and housing

crises of the Great Recession

The consequences of the twin crises

and the debilitating aftermath

After the progressive reforms that

will make our financial markets work

for everyone

Systemic supervision The nancial regulatory system is

ragmented, with no single regulator

responsible or the overall stability o the

nancial system or ability to oversee large

nonbank nancial institutions such as

insurance companies and investment rms.

Nearly 10 million jobs are lost,1 and the

average net worth o U.S. households drops

to $77,300 in 2010 rom $126,400 in 2007

ater the nancial crisis.2

The new Financial Stability Oversight

Council has responsibility or monitoring

systemic risk and identiying systemically

important nancial institutions, including

banks and nonbanks.

Capital requirements Banks are subject to capital requirements,

but in the lead up to the nancial crisis,

investment banks in particular became

vastly over-leveraged with debt.3

Financial institutions are unable to weather

economic shocks because o inadequate

capital buers; in 2009, when the Federal

Reserve carried out a test to measure thenancial health o the 19 largest banks, it

ound that 10 would have needed to raise a

total o $75 billion to have adequate capital

buers to withstand an adverse economic

shock.4

new rules require banks to hold additional

capital so that losses are absorbed by

private sector investors, not taxpayers; in

March 2012, 15 o the 19 largest banksare ound by the Federal Reserve to have

sufcient capital to absorb a new nancial

crisis.5

Too big to ail No clear resolution authority exists or

banks considered too big to ail, leaving

taxpayers unknowingly on the hook.

American taxpayers shell out billions

o dollars in ederal support to bail out

nancial institutions and restore condence

in the nancial markets.

Measures in Dodd-Frank include a process

to liquidate and sell o ailing institutions

without the need or bail outs; banks and

nonbanks are required to submit living

wills to assist in this process; nine o the

worlds largest banks presented their wills

to regulators in July 2012.6

Consumer protection Fragmented responsibility delegated across

several ederal agencies enables predatorylending on a massive scale, with consumers

vulnerable to conusing and sometimes

deceptive products and lending practices.

Consumers bear the brunt o the housing

and nancial crises, as housing valuesplummeted and mortgage oreclosures

ballooned.7

The Consumer Finance Protection Bureau

is created to enorce consumer nancialprotection laws, ensure consumer access to

nancial services, and promote consumer

education.

Executive pay Shareholders have only limited ability to

aect executive compensation, even in the

ace o huge disconnects between pay and

perormance.

The ratio o CEO-to-worker pay in S&P 500

companies widened rom 42-to-1 in 1980

to 380-to-1 in 2011.8

The new say-on-pay rules oer the

opportunity to reign in excessive executive

pay by requiring publicly traded rms to

submit executive compensation plans to

shareholder votes at least once every three

years, creating a stronger link between

executive pay and perormance.

Proprietary trading The banks taking ederally insured

customer deposits are also making

hundreds o billions o dollars o risky bets

or their own accounts.

Banks hold hundreds o billions in

mortgage securities on their trading books,

contributing to the nancial crisis.9 JP

Morgan Chase & Co.s losses o $5.8 billionon a directional bet10 demonstrates that

banks need strong rules to prevent them

rom taking risky bets to boost prots.

The Volcker Rule will prohibit ederally

insured banks rom proprietary trading,

ensuring that banks are no longer allowed

to engage in speculative activitiesunrelated to essential banking services.


14/17


Our financial

markets

Before the financial and housing

crises of the Great Recession

The consequences of the twin crises

and the debilitating aftermath

After the progressive reforms that

will make our financial markets work

for everyone

Over-the-counter

derivatives

The unregulated over-the-counter

derivatives market grows rapidly in the

1990s until it reached $683 trillion in

2008,11 with complex and opaque products

trading outside the scrutiny o regulations.

Large and opaque derivatives books

contribute to excessive leverage, nancial

contagion, and panic during the crisis. For

example, credit deault swaps contributed

to the all o the global insurance giant

American International Group Inc., which

cost taxpayers $182 billion.12

Most derivatives will be traded on a

regulated exchange and will be subject to

more transparency and oversight by the

regulatory agencies. Financial institutions

that deal in these products will be required

to hold more capital as a buer against

losses.

Mortgage

origination and

securitization

Securitization makes mortgages available

to more Americans, but misaligned

incentives encourage poor underwriting

and dangerous broker compensation

practices, resulting in the origination o

risky mortgages that ailed when the

housing bubble burst.

There was a more than 30 percent peak-

to-trough decline in home prices between

2006 and 2012,13 and banks have sent

oreclosure notices to more than 11 million

properties since 2007.14

Mortgage securitizers will now have to

retain a 5 percent share o the risk o a

securityexcept in the case o very sae

mortgagesand they cannot hedge or

sell the retained risk. Lenders will have to

ensure that customers have the ability to

repay their mortgage or the lie o the

loan, and originators cannot get paid more

to put borrowers into unnecessarily risky or

expensive mortgages.

Funding the inancial

regulators

Most o the nancial regulators have

unding streams. But the utures and

commodities regulatorthe Commodities

and Futures Trading Commissionis

unded solely through congressional

appropriations.

The Commodity Futures Trading

Commission has been vulnerable to budget

cuts and congressional appropriations

while it attempts to implement Dodd-

Frank.

Ensuring the commission is adequately

unded would provide a stable unding

source or the agency, enabling it to

implement Dodd-Frank and eectively

police the derivatives markets.

Ensuring

coordinated global

inancial reorm and

strong international

minimum standards

Globally interconnected nancial markets

spread risks across national borders with

minimal integrated global regulatory rules.

Continued problems in the Eurozone cast

a long shadow over global growth. Many

large nancial institutions are still closely

interconnected, so the impact o a breakup

o the currency could spread to the U.S.

economy.

There has been considerable progress

toward globally agreed-upon rules,15

but more needs to be done to protect

global nancial stability and to preserve

the advantages o an open and globally

integrated nancial system.

1 Philip J. Swagel, The Cost o the Financial Crisis: TheImpact o the September 2008 Economic Collapse.Brieng paper No. 18, (Pew Financial Reorm Group,2010), available at http://ww w.pewr.org/admin/proj-ect_reports/les/Cost-o-the-Crisis-nal.pd.

2 Board o Governors o the Federal Reserve System,Federal Reserve Bulletin, June 2012 (Federal Reserve ,2012).

3 Stephen Labaton, Agencys 04 Rule Let Banks PileUp New Debt, New York Times, October 2, 2008,available at http://ww w.nytimes.com/2008/10/03/business/03sec.html?_r=1.

4 Daniel Tarullo, Lessons rom the Crisis Stress Tests,speech at International Research Forum on MonetaryPolicy, Washington, D.C., March 26, 2010, available athttp://www.ederalreserve.gov/newsevents/speech/tarullo20100326a.htm.

5 Peter Evis and J.B Silver-Greenberg, 15 o 19 BigBanks Pass Feds Latest Stress Test, New York Times,March 13, 2012, available at http://www.nytimes.com/2012/03/14/business/jpmorgan-passes-stress-

test-raises-dividend.html.

6 Ronald D. Orol, Bank living-will plans center on re salehopes, Market Watch blog or the Wall Street Journal,July 10, 2012, available at http://articles.marketwatch.com/2012-07-10/economy/32608529_1_large-banks-commercial-bank-donald-lamson.

7 Center or Responsible Lending, Restoring Integrityto the Financial System Predatory Lending and theEconomic Crisis (2009), available at http://ww w.responsiblelending.org/allies/issue-guide-economic-crisis-nancial-reorm-sept-2009.pd.

8 Pat Garoalo, Average Fortune 500 CEO Now Paid 380Times As Much As The Average Worker, ThinkProgress,April 19, 2012, available at http://thinkprogress.org/economy/2012/04/19/467516/ceo-pay-gap-2011/.

9 James Crotty, Gerald Epstein, and Iren Levina, Pro-prietary trading is a bigger deal than many bankersand pundits claim, Policy Notes 15 (February 2010),available at http://www.peri.umass.edu/leadmin/pd/other_publication_types/SAFERbries/SAFER_note15.pd.

10 Jessica Silver-Greenberg, JPMorgan Says Trading Loss

Tops $5.8 Billion; Prot or Quarter Falls 9%, DealBookblog or New York Times, July 13, 2012, available athttp://dealbook.nytimes.com/2012/07/13/jpmorgan-reports-second-quarter-prot-o-5-billion-down-9/.

11 Jacob Gyntelberg and Carlos Mallo, OTC derivativesmarket activity in the second hal o 2008 (Basel: Banor International Settlements, 2009).

12 Bailed-out AIG sues U.S. or $30.2M, CBS News, July6, 2012, available at http://www.cbsnews.com/8301-505123_162-57467855/bailed-out-aig-sues-u.s-or-$30.2m/.

13 S&P/Case-Shiller Home Price Indices, available athttp://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpid--p-us---- (last accessed July 2012).

14 Center or Responsible Lending, Restoring Integrityto the Financial System Predatory Lending and theEconomic Crisis.

15 U.S. Department o State, World Finance Reorm StillWork in Progress, U.S. Ocial Says (2012), availableat http://iipdigital.usembassy.gov/st/english/ar-ticle/2012/04/201204194250.html#ixzz20oNN7yQA.


15/17


Conclusion

In a leter o he leaders o he G-20 in advance o he Rio Summi, he members o he

Financial Sabiliy Boardhe inernaional body ha moniors and makes recommen-

daions on he global nancial sysemsaid coninued nancial reorm was par o he

soluion o economic growh.53

Te sakes o seeing nancial reorms hrough are huge. As Dennis Kelleher o he

public advocacy group Beter Markes poined ou in a recen esimony beore a House

commitee, Te Dodd-Frank law is inended o proec he American people, axpay-

ers, and he U.S. reasury rom ever again having o suer hrough and pay or anoher

nancial collapse and economic crisis.54

Dodd-Frank creaed a new se o ools or regulaors o keep our nancial markes more

srong and secure. Te ask now is o nish he job ha was sared.

Jennier Erickson is Direcor o Compeiiveness and Economic Growh a he Cener orAmerican Progress, amara Fucile is Vice Presiden or Governmen Aairs a he Cener, and

David J. Luton is a Visiing Scholar a he Cener and a he Cener or European Sudies a

Harvard Universiy.


16/17


Endnotes

1 Alan Krueger, speech to the Treasury Borrowing AdvisoryCommittee on the Securities Industry and Financial MarketsAssociation, as cited in Jay Hefi n, Financial crisis costhouseholds $17 trillion, Treasury ocial says, The Hill,May 3, 2010, available at http://thehill.com/blogs/on-the-money/801-economy/95689-nancial-crisis-cost-house-holds-17-trillion-treasury-ocial-says.

2 Federal Reserve, Federal Reserve Bulletin, 98 (2) (2012).

3 Elizabeth Warren deends new consumer nancial agencyagainst strong criticism rom Republicans,Los AngelesTimes, March 16, 2011, available at http://latimesblogs.latimes.com/money_co/2011/03/elizabeth-warren-consum-er-nancial-protection-bureau-congress-oversight-deend.html.

4 David Nakamura and Felicia Sonmez, Obama appointsRichard Cordray to head co nsumer watchdog bureau,TheWashington Post, January 4, 2012, available at http://www.washingtonpost.com/politics/richard-cordray-appointed-by-obama-to-head-consumer-watchdog-bureau/2012/01/04/gIQAGyqraP_story.html.

5 Consumer Finance Protection Bureau, CFPB probe intoCapital One credit card marketing results in $140 mill ionconsumer reund, Press release, July 18, 2012, availableat http://www.consumernance.gov/pressreleases/cpb-capital-one-probe/.

6 Matthias Rieker, Andrew R. Johnson, and Alan Zibel, CapitalOne Dealt Fine For Pitch to Customers,TheWall Street Jour-nal, July 18, 2012, available at http://online.wsj.com/article/SB10001424052702304217904577534782507899336.html.

7 Know Beore You Owe, available at http://www.consumer-nance.gov/knowbeoreyouowe/.

8 Michael Barr, Dont Roll Back Wall Street Reorm: Dodd-Frank Act Key to a Healthy Financial System (Washington:Center or American Progress, 2011).

9 Center or Responsible Lending, Restoring Integrity tothe Financial System Predatory Lending and the EconomicCrisis (2009), available at http://www.responsiblelending.org/allies/issue-guide-economic-crisis-nancial-reorm-sept-2009.pd.

10 PWC, FS Regulatory Brie: The FSOC Finalizes Rules andGuidance or Designating Non-Bank Financial Companies as

SIFIs (2012), available at http://www.pwc.com/en_US/us/nancial-services/regulatory-services/publications/assets/pwc-soc-non-bank-si-nal-rule-summary.pd.

11 Financial Stability Oversight Council, Financial StabilityOversight Council Makes First Designations in Eort toProtect Against Future Financial Crises, Press release, July18, 2012, available at http://www.treasury.gov/press-center/press-releases/Pages/tg1645.aspx.

12 Ira Teinowitz, Dodd-Franks SIFI designations to hit non-bank rms, The Deal Pipeline Blog, April 9, 2012, available athttp://www.thedeal.com/content/regulatory/dodd-ranks-si-designations-to-hit-nonbank-rms.php.

13 Peggy Twohig and Steve Antonakes, The CFPB launches itsnonbank supervision program, CFPB Blog, January 5, 2012,available at http://www.consumernance.gov/blog/the-cpb-launches-its-nonbank-supervision-program/.

14 Daniel Tarullo, Testimony beore the Senate Committee onBanking Housing and Urban Aairs, Implementing WallStreet Reorm: Enhancing Bank Supervision and ReducingSystemic Risk, June 6, 2012, available at http://banking.senate.gov/public/index.cm?FuseAction=Hearings.LiveStream&Hearing_id=99710e94-9342-4d7a-ae92-a446579454.

15 Allan Mattich, More Capitals Answer to Too Much BankRegulation, The Source Blog, TheWall Street Journal, July 12,2012, available at http://blogs.wsj.com/source/2012/07/12/more-capitals-answer-to-too-much-bank-regulation/.

16 Peter Evis and J.B Silver-Greenberg, 15 o 19 Big Banks PassFeds Latest Stress Test, TheNew York Times, March 13, 2012,available at http://www.nytimes.com/2012/03/14/business/jpmorgan-passes-stress-test-raises-dividend.html.

17 Daniel Tarullo, speech at International Research Forumon Monetary Policy, Lessons rom the Crisis Stress Tests,Washington, D.C., March 26, 2010, available at http://www.ederalreserve.gov/newsevents/speech/tarullo20100326a.

htm.

18 Shelia Bair, FDIC Oversight: Examining and Evaluating theRole o the Regulator during the Financial Crisis and Today,Testimony beore the House Subcommittee on FinancialInstitutions and Consumer Credit, May 26, 2011, availableat http://www.dic.gov/news/news/speeches/chairman/spmay2611.html.

19 Ronald D. Orol, Bank living-will plans center on re salehopes, MarketWatch, July 10, 2011, available at http://arti-cles.marketwatch.com/2012-07-10/economy/32608529_1_large-banks-commercial-bank-donald-lamson.

20 Ronald D. Orol, Banks ace 2012 deadline or living wills,MarketWatch, September 13, 2011, available at http://arti-cles.marketwatch.com/2011-09-13/economy/30704186_1_dic-banks-ace-oreign-banks.

21 Alexandra Alper and David Henry, Top banks say they

not too big to ail,Reuters, July 3, 2012, available at http://www.reuters.com/article/2012/07/03/banks-bailouts-wills-idUSL2E8I3C3M20120703.

22 James Lamont, Buett hits at negligent US executive pay,Financial Times, March 25, 2011, available at http://ww w.t.com/intl/cms/s/0/43627d0a-5712-11e0-9035-00144ea-b49a.html#axzz20W2hM04A.

23 Diane Brady, Say on Pay: Boards Listen When ShareholdersSpeak, Bloomberg Businessweek, June 7, 2012, available athttp://www.businessweek.com/articles/2012-06-07/say-on-pay-boards-listen-when-shareholders-speak.

24 Ibid.

25 Aaron Ricadela, Hewlett-Packard Shareholders Vote AgainstExecutive Compensation Packages, Bloomberg, March 23,2012, available at http://www.bloomberg.com/news/2011-03-23/hewlett-packard-shareholders-vote-against-execu-tive-pay-1-.html.

26 Ex-Treasury secretaries back Volcker rule, Reuters,February 21, 2010, available at http://www.reuters.com/article/2010/02/22/us-nancial-regulation-secretaries-idUSTRE61L0BB20100222

27 Peter Coy, JPMorgans Big Loss: Volckers Not So DumbAter All, Bloomberg Businessweek, May 11, 2012, availableat http://www.businessweek.com/articles/2012-05-11/jpmorgans-big-loss-volckers-not-so-dumb-ater-all.

28 Je Merkley, Senate Committee on Banking Housing andUrban Aairs, A Breakdown in Risk Management: WhatWent Wrong at JP Morgan Chase?, available at http://bank-ing.senate.gov/public/index.cm?FuseAction=Hearings.LiveStream&Hearing_id=da72e001-ea93-4462-9057-a692b11e9c54.

29 Obama talks JP Morgan, calls or Wall Street reorm, CBSNews, May 15, 2012, available at http://www.cbsnews.com/

video/watch/?id=7408630n

30 Volcker Rule,The New York Times, May 10, 2012, availableat http://topics.nytimes.com/top/reerence/timestopics/subjects/v/volcker_rule/index.html.

31 Wall Street Reorm, available at http://www.levin.senate.gov/issues/wall-street-reorm.

32 Buett warns on investment time bomb, BBC News, March4, 2003, available at http://news.bbc.co.uk/2/hi/2817995.stm.


17/17

33 Jacob Gyntelberg and Carlos Mallo, OTC derivatives marketactivity in the second hal o 2008, (Basel, Switzerland: Bankor International Settlements, 2009), available at http://www.bis.org/publ/otc_hy0905.pdf.

34 Bailed-out AIG sues U.S. or $30.2M, CBS News, July 6, 2012,available at http://www.cbsnews.com/8301-505123_162-57467855/bailed-out-aig-sues-u.s-or-$30.2m/.

35 Brady Dennis, Ater 24 years, AIG lays Financial Prod-ucts unit to rest, TheWall Street Journal, August 5, 2011,available at http://www.washingtonpost.com/business/economy/ater-24-years-aig-lays-nancial-products-unit-to-

rest/2011/08/05/gIQAvty4wI_story.html.

36 US regulator nally denes a swap, starts reormcountdown, Reuters, July 10, 2012, available at http://in.reuters.com/article/2012/07/10/ctc-swap-vote-idIN-L2E8IA3K720120710.

37 Committee on Financial Services Democrats, BarneyFranks Statement Regarding Further Evidence o the Needor Adequate CFTC Funding, Press release, June 29, 2012,available at http://democrats.nancialservices.house.gov/press/PRArticle.aspx?NewsID=1477.

38 Letter rom American or Financial Reorm to CongressionalRepresentatives, June 12, 2011, available at http://ournan-cialsecurity.org/blogs/wp-content/ournancialsecurity.org/uploads/2012/06/AFR-CFTC-Approps-Letter-6-21-121.pd.

39 Ibid.

40 CFTC, Commodity Futures Trading Commission PresidentsBudget FY 2013 (2012), available at http://w ww.ctc.gov/ucm/groups/public/@newsroom/documents/le/ctcbud-get2013.pd.

41 Nick Paraskeva, Barclays case gives U.S. utures regulatormore clout on overseas derivatives, unding, Financial Reg-ulatory Forum Blog, Reuters, July 5, 2012, available at http://blogs.reuters.com/nancial-regulatory-orum/2012/07/05/barclays-case-gives-u-s-utures-regulator-more-clout-on-overseas-derivatives-unding/.

42 Oce o Management and Budget, Budget of the UnitedStates Government, Fiscal Year 2013: Appendix(2012), avail-able at http://www.whitehouse.gov/omb/budget/Appen-dix.

43 Letter rom Americans or Financial Reorm to Congress,May 4, 2010, available at http://ournancialsecurity.org/blogs/wp-content/ournancialsecurity.org/up-loads/2012/05/AFR-CFTC-Funding-Letter-05-4-12.pd.

44 Speech rom Governor Sarah Bloom Raskin at the 2011Midwinter Housing Finance Conerence, Park City, Utah,February 11, 2011, available at http://ederalreserve.gov/newsevents/speech/raskin20110211a.htm.

45 Ryan McCarthy, Obama To G20: Its Time To Act OnFinancial Reorm, Can He Get World Leaders On Board?,The Hungton Post, March 29, 2010, available at http://www.hungtonpost.com/2010/03/30/obamas-tells-g20-to-lead_n_518587.html.

46 Brown heralds G20s route map, BBC News, November16, 2008, available athttp://news.bbc.co.uk/2/hi/uk_news/

politics/7731932.stm.

47 U.S. Department o State, World Finance Reorm StillWork in Progress, U.S. Ocial Says, April 19, 2012, avail-able at http://iipdigital.usembassy.gov/st/english/ar-ticle/2012/04/201204194250.html#ixzz20oNN7yQA.

48 Basel III,Financial Times, available at http://lexicon.t.com/Term?term=Basel-III.

49 Kevin F. Barnard and Alan W. Avery, Basel III v Dodd-Frank:What Does it mean or US Banks, Whos Who Legal Bl og,available at http://www.whoswholegal.com/news/eatures/article/28829/basel-iii-v-dodd-rank-does-mean-us-banks/.

50 The Federal Reserve Proposes Basel III Capital Frame-work or U.S. Financial I nstitutions, Financial Regula-tory Reorm Center Blog, June 2012, available at http://nancial-reorm.weil.com/commercial-banks/ederal-reserve-proposes-basel-iii-capital-ramework-nancial-

institutions/#ixzz211O5u3uo.

51 U.S. Department o State, World Finance Reorm.

52 Letter rom Financial Stability Board to G-20 Leaders, June13, 2012, available at http://www.nancialstabilityboard.org/publications/r_120619d.pd.

53 Ibid.

54 Dennis M. Kelleher, The Impact o Dodd-Frank onCustomers, Credit, and Job Creators, Testimony beorethe Committee on Financial Services Subcommittee onCapital Markets and Government Sponsored Enterprises,during Questions and Answers, July 10, 2012, available athttp://nancialservices.house.gov/Calendar/EventSingle.aspx?EventID=301909.

Dodd-Frank Financial Reform After Two Years

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