You didn’t think you were going to walk away unscathed, did you?
The historic Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is now law. The 2,300-page statute takes aim at the financial-services industry, imposing a raft of new regulations and capital requirements on banks and other financial institutions, all with the goal of heading off any possible repeat of the financial crisis that brought the nation to its knees in 2008. But reform on that scale has many ripple effects, and some will inevitably wash over bank customers. While the full impact will not be known until regulators hash out final rules for enforcing the act, there are a number of areas where it is clear that Dodd-Frank will affect nonfinancial companies and their relationships with their banks.
Capital, Cost, and Credit
The overarching concern among finance executives who have tracked the legislation is that compliance will impose on banks heavy additional costs that they will pass along to their customers — making financial services, and bank credit, harder to get and more expensive. Dodd-Frank not only promises voluminous new regulations — it requires federal agencies to draft 533 new rules, conduct 60 new studies, and produce 94 reports over the next four years — but it also imposes new capital requirements on banks and other financial-services firms.
As one example, the act requires that the Federal Reserve establish risk-based capital requirements and leverage limits for “systemically important” financial institutions that are more stringent than those for nonsystemic firms. Systemically important institutions — those whose failure could conceivably cripple financial markets — will include bank holding companies with total consolidated assets of $50 billion or more, nonbank companies that derive at least 85% of their annual consolidated revenues (or at least 85% of their consolidated assets) from financial activities in the United States, and large insurance companies identified as systemically important by the Federal Insurance Office.
(Coincidentally, these new capital requirements are being developed just as the Basel Committee on Banking Supervision has debuted new rules that will boost capital requirements for global banking institutions. Those rules will take effect in stages from 2013 through 2019.)
“Some large financial institutions used to have 40:1 leverage ratios,” observes Don Ogilvie, independent chairman of the Deloitte Center for Financial Services, which is part of Big Four consulting firm Deloitte LLP. “Under the new regulations, combined with the capital requirements outlined in Basel II, they’re going to have, at the maximum, leverage ratios of 10:1 to 15:1. We’re going through a great period of deleveraging, so there just won’t be as much money available from financial institutions going forward.”
Attorney Ernie Patrikis, a partner in the bank and insurance regulatory practice at New York–based law firm White & Case LLP, questions whether this will encourage the growth of the so-called phantom banking system, including hedge funds and other institutions that have not been subject to oversight by the Federal Reserve.