By Richard Neiman
The Dodd-Frank financial reform legislation is a victory for New York as well as for the nation. As the country’s financial center, New York has experienced the market turmoil firsthand. Our residents have suffered through lost homes, lost savings, lost jobs and lost opportunities. But our financial services sector, the majority of which was engaged in reputable business practices, also suffered financially and in terms of reputation.
Spreads may have stabilized in the capital markets, but a crisis of confidence in the banking sector still remains. The new legislation will go a long way toward rebuilding the public’s confidence in individual institutions, in the industry as a whole, and in the ability of the regulatory system.
As important as the legislation is, there is still more to be done. There are many implementing rules yet to be written, that will fine-tune the reform process and give it final shape. I would like to take the opportunity in this column to lay out several areas that I see as particularly impacting New York institutions.
One of those most far-reaching changes is the bill’s rollback of the federal overreach in preemption. The OCC’s sweeping ruling in 2004, which overrode virtually all state consumer protection laws, has itself been swept aside. State laws will now be considered on a case-by-case basis for actual conflict, and the OCC’s decisions will be given a more limited form of deference by the courts.
Another important point is that Dodd-Frank overturns the decision in Watters v. Wachovia with respect to operating subsidiaries of national banks. These op subs will no longer be able to benefit from state incorporation without also being subject to state laws.
The upshot of these preemption changes is a more level playing field. Especially in states like New York with progressive consumer protection laws, restoring the right state-federal balance in preemption reduces the opportunities for arbitrage and unfair competition by national banks. It is now far less likely that two banks on the same street will be operating under different rules, with different income potential and compliance costs, simply based on charter type. Congress has effectively raised standards across the board.
Consumer Financial Protection Bureau
A related issue is the bill’s creation of a new Consumer Financial Protection Bureau (CFPB) within the Federal Reserve. I would like to emphasize that the creation of this new Bureau does not change my view of the New York State Banking Department’s continuing responsibility in this area. We will still be performing consumer compliance and fair lending exams of our state-chartered institutions, including the largest. However, under the new law, our federal counterpart for consumer exams will be the Federal Reserve or the FDIC for banks with assets under $10 billion, or the CFPA for banks with assets over $10 billion.
In terms of the CFPB’s more universal rule-writing function, the Banking Department intends to be an engaged partner in contributing to that process. With respect to non-banks in particular, that is a new oversight area for the federal government which would benefit from the states’ experience in licensing and supervising these entities. The new state-federal balance will need to bear fruit here in meaningful cooperation between regulators.
The rule-making related to the Dodd-Frank bill, as well as the Basel process, will also lead to higher prudential standards for banks of all sizes – not just those that may be deemed systemically significant. While specific ratios and metrics are still under development in the U.S. and around the world, I can say already that supervision will be taking a “back to basics” approach. That is, whether it is capital, liquidity, or other measures of soundness, I anticipate greater integration of qualitative checks and established quantitative metrics such as the liquidity coverage ratio proposed in Basel III. Institution-specific risk models still hold great promise, but they were over-relied upon in the run-up to the crisis even when the outputs contradicted common sense.
I understand the pressures on banks in this recession. There are calls on every side for banks to increase lending, at the same time that policymakers rightfully expect improved underwriting and higher prudential standards. To avoid a stalemate, the rulemaking phase is critical and should balance heightened standards with appropriate concern for credit availability. With input from the industry here in New York, consumer groups, and other stakeholders, I am confident that we will fully realize the potential of this new landmark legislation.
Richard H. Neiman, superintendent of the New York State Banking Department, writes on regulatory issues for Banking New York.