Dodd-Frank Act

The Dodd-Frank Act regulating the US Financial services sector has just been enacted and it is worth considering some of the issues surrounding it. It is a mammoth piece of legislation and was the result of many hours of horse trading between the different factions and parties. It covers a huge panoply of financial activities and is meant to cover 6 areas:

1. Consolidation of regulators and a new oversight council
2. Comprehensive regulation of financial markets, including brining derivatives onto exchanges and of credit agencies
3. Consumer protection provisions
4. Tools for dealing with financial crises
5. Improvement of international standards and accounting
6. The Volcker rule, prohibiting depositary banks from proprietary trading (cf Glass-Steagall)

There are 16 "Titles" as follows:

1. Financial Stability
2. Orderly Liquidation Authority
3. Transfer of Powers from the OTS
4. Regulations of Advisers to Hedge Funds and Others
5. Insurance
6. Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions
7. Wall Street Transparency and Accountability
8. Payment, Clearing, and Settlement Supervision
9. Investor Protections and Improvements to the Regulation of Securities
10. Bureau of Consumer Financial Protection
11. Federal Reserve System Provisions
12. Improving Access to Mainstream Financial Institutions
13. Pay It Back Act
14. Mortgage Reform and Anti-Predatory Lending Act
15. Miscellaneous Provisions
16. Financial Crisis and Assessment Fund

It is not practical to describe the operations of the Act but some comments are suitable here:

The impact on non financial companies is not severe in itself although non financial companies might be included if very large. Most non financial companies will not have to trade derivatives over exchanges. However, it is almost inevitable that the cost of dealing with financial institutions will be increased although in the US much more use is made of non bank sources of finance, such as private placements and bond finance.

There do seem to be omissions and weaknesses in the Act. It doesn’t seem to do enough to deter banks from putting the system at risk. The root of this is the Agency issue, whereby managers of banks do not lose personally if their employer bank fails. It does seem to make life slower to help firms in distress as help is limited. Some institutions are notably omitted, mainly the quasi governmental banks, Fannie Mae and Freddie Mac and the money market funds which are crucial providers of liquidity to the financial sector.

Sarbanes Oxley was a similar type of legislative reaction to corporate excess and has arguably kept firms out of the US capital markets, at a cost to the US. It also makes a highly interventionist approach by other blocs, notably Europe, more likely. All of this will make life more expensive for corporates, time to start looking at non bank sources of finance.

http://www.ft.com/cms/s/0/ccbb38ea-9010-11df-91b6-00144feab49a.html
http://www.ft.com/cms/s/0/e355c680-8212-11df-938f-00144feabdc0.html
http://www.shearman.com/files/Publication/16e04a4c-431a-4791-86a9-c2d69c...
http://www.treasurers.org/node/6163
http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_C...
http://www.gtnews.com/news.cfm?id=12559
http://www.gtnews.com/article/8067.cfm

By Will Spinney