By Steve Viuker
New York City was the place and Dodd-Frank/Basel III was the topic at a recent Marcus Evens conference.
“Dodd-Frank has laws and Basel III puts flesh to those ideas in a very concrete way,” said Clifton Loo, head of economic capital at SunTrust Banks. “There are some things being done in Dodd-Frank that were in Basel III, but are just being implemented in the United States now.”
The big question, he said, is internationally.
“Will there be uniform implementation? It’s about competitiveness,” he said. “When your competitor doesn’t have the same capital restrictions as you, that will be a disadvantage in the marketplace. It will slow down business. Holding capital means you can’t make as much money in other places. There will be more stringent capital requirements. This all requires resources, and that means costs.”
Although Basel III and the Dodd-Frank Act have similar objectives, there are differences in the capital requirements imposed by Dodd-Frank and the standards proposed under Basel III. There are also important differences in the implementation schedules. These differences will lead to uncertainties for U.S. institutions until the federal financial regulatory agencies work out how to resolve them in the implementation process.
There is significant uncertainty as to how Basel III will interact with the Collins Amendment, which requires that U.S. federal banking agencies prescribe minimum leverage capital requirements and minimum risk-based capital requirements on a consolidated basis for insured depository institutions, bank holding companies, savings and loan holding companies, and non-bank financial companies supervised by the Federal Reserve.
“I know at our bank it’s taken a lot of resources,” said Loo. “Regulators have asked us to create a dedicated group as opposed to just having volunteers from the bank create the CCAR results. Mortgages are a good example. You had a 50 percent risk-weighted asset. Now it can be up to 200 percent, and that’s on a secured asset. That’s the bread and butter of many smaller banks. If you’re asking a smaller bank to hold a lot of capital versus their bread and butter, they might say, ‘Hey, we’re not making enough money for this.’”
Indeed, Dodd-Frank is in a state of flux after a recent court ruling. A federal judge heard a challenge to a rule that requires mutual funds that invest in certain financial instruments to register with the Commodity Futures Trading Commission (CFTC). The CFTC said that the financial overhaul bill gave it authority to set the new rules for mutual funds. But the plaintiffs said the rule is unrelated to the Dodd-Frank law, and that the agency is using that law “to change the subject” because the regulation is neither necessary nor justified by economic analysis.
In the decision, U.S. District Judge Robert L. Wilkins told the CFTC it needed to justify the need for a regulation that would limit how many contracts a trader can obtain for the future delivery of 28 commodities, including natural gas and oil. The rule also would have applied to certain financial instruments known as swaps, a form of derivative. The agency said it was acting under a Dodd-Frank mandate designed to reduce excessive speculation in the commodities market so that no one trader could control such a large percentage of the market that it skews prices.
Writing for The National Review, Peter J. Wallison, a senior fellow at the American Enterprise Institute, said the following: “Title II of Dodd-Frank gives the secretary of the Treasury the authority to seize any financial firm he believes is likely to fail in the future and hand it over to the FDIC for liquidation. If the firm objects, the secretary can apply to a court for a ruling, but the court has one day to decide whether the secretary has acted unreasonably. Stays and appeals are prohibited. If the court does not act in that one day, the firm is remitted to the FDIC “by operation of law.” Again, it will be a bold firm that challenges the administration in power if the Treasury secretary has this authority.
But Steven M. Davidoff, a professor at the Michael E. Moritz College of Law at The Ohio State University, believes Dodd-Frank is better than the alternatives. Writing in The New York Times, Davidoff said, “The fundamental issue is that a few banks have grown to be enormous over the last two decades.”
According to SNL Financial, four banks each had more than a trillion dollars in assets at the beginning of the year. So, Dodd-Frank didn’t create “too big to fail” institutions. The banks themselves did because it made them money.
The financial reform law takes two tacks in dealing with these institutions. First, Dodd-Frank tries to figure out who they are and charge them for being too big. This is done by raising their regulatory costs through more oversight and supervision.
It means more governmental red tape for these banks, but also ostensibly fewer problems because of it. Regardless, one purpose of this increased regulation is to impose a regulatory tax on big banks to push them to be smaller.
Second, Dodd-Frank addresses the “Lehman” problem – that bankruptcy may not work for a huge financial failure. Instead, a new regime is created to put big institutions into what is hoped to be an orderly receivership that avoids a general financial panic, something that unfortunately happened when Lehman Brothers filed for bankruptcy in September 2008.