Banking Under Dodd-Frank Takes Shape With Volcker-Rule Approval
With the release of the Volcker rule, the Dodd-Frank Act's regulatory overhaul is largely complete, giving banks a new degree of certainty about the limits of their business in the wake of the 2008 financial crisis.
The rule, issued Tuesday by five U.S. agencies, bars banks from speculating with their own money. In the three years since Dodd-Frank was enacted, regulators also have completed guidelines on how the government will dismantle the largest financial institutions when they fail, taken steps to make derivatives trading more transparent, increased the amount of capital banks must hold, and defined which mortgages are considered risky.
"You can see the light at the end of the tunnel for the most important components of the rulemaking process," said Isaac Boltansky, an analyst at Compass Point Research & Trading LLC in Washington. "The most visible components of the Dodd-Frank Act are nearly finalized."
To be sure, about a third of the hundreds of rules mandated by Dodd-Frank remain to be written or completed, including those governing credit-rating firms and the disclosure of counterparty credit risk. Banks are challenging some derivatives regulations in court. They've also managed to reduce the impact of some changes through intense and sustained lobbying as the rules are being written.
Among the remaining mandates are higher bank liquidity requirements to comport with Basel III agreements and the removal from SEC rules of third-party credit ratings as an acceptable measure of credit worthiness.
Still, the new regulatory architecture has already begun to reshape the way financial institutions manage risk and conduct their operations. Banks are holding more liquid capital. Accounting has become more transparent. Regulators have much better information about the prices realized on completed swap trades, and large hedge funds now report previously secret financial information to regulators.
The result could form part of the legacy of President Barack Obama, who took office just after the financial crisis and made Dodd-Frank a centerpiece of his agenda.
With Wednesday's approval of the Volcker Rule, "regulators have taken a critical step toward completing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act," Treasury Secretary Jacob Lew said in a statement Tuesday. "The Volcker Rule will change behavior and practices in our financial markets to safeguard taxpayers from risks created by banks' proprietary trading."
The effects of Dodd-Frank began rippling through the financial system even before the rules were written. Barney Frank, the former Democratic congressman from Massachusetts who co-wrote the legislation, said the fact that rules were pending "had a restraining effect" on bank risk-taking.
"What financial institution executive in their right mind would say, 'There's about to be a rule on this. I'll sneak in under the wire and do this thing'?" Frank said in an interview.