This bill, now headed to President Obama's desk to be signed into law, is a sweeping piece of legislation -- the broadest banking overhaul since the Great Depression -- seen by some as having significant regulatory penalties for financial institutions now and in the future.
Other observers, including William Isaac, former chair of the Federal Deposit Insurance Corporation, call this a flawed attempt at reform. "It's inept and woefully inadequate," Isaac says. "[These reforms] really don't address any of the major issues that caused the crisis. They would not have prevented the crisis had they evolved five years ago, and they won't prevent the next crisis."
Ed Yingling, president of the American Bankers Association, says the new legislation does contain some key reform provisions that bankers have long supported. "These reforms include creation of a new systemic regulatory body, a new process for ending the concept of too-big-to-fail, better consumer protections, and provisions designed to rein in the shadow banking system" Yingling says. But at the same time, he believes the reforms will overload with new regulations many institutions that were not responsible for the financial crisis.
What Will ChangeAmong its measures, the bill creates a Financial Stability Oversight Council, chaired by the Secretary of the Treasury and populated with heads of the financial regulatory agencies. The Council's role will be to designate firms for heightened supervision by the Federal Reserve. It will set stronger standards for the safety of specific institutions and the stability of entire system.
The Federal Reserve will have examination and enforcement authority over all bank holding companies over $50 billion, as well as any non-bank financial companies identified as posing systemic risk. This means now the largest, most complex financial institutions will have thorough oversight no matter how they are structured.
The current banking regulatory agencies remain intact except for the Office of Thrift Supervision, which would be rolled up into the Office of the Comptroller of the Currency.
The bill also creates an Office of Financial Research in the Treasury Department. This office would help the Council by collecting risk data throughout the financial system.
Additionally, the bill would impose a new mandatory stress-testing regime on the largest bank holding companies and designated non-bank firms. It requires the largest firms to have plans for their breakup and closure in case they end up in severe financial trouble. Regulators can make institutions, including parent companies, take quick action to raise capital reserves. This bill would restrict riskier business ventures by banks, including excessive growth by buying other banks.
The Dodd-Frank bill creates a far-reaching regulatory framework for the derivatives markets. Standardized derivatives now will be traded and cleared in a central location. Derivative clearing houses will have oversight by regulators for conservative risk management standards, and public reporting requirements.
Regarding the "Too Big to Fail" question, regulators will have the authority to shut down and break up large, non-bank financial firms. It will be based on the FDIC resolution process. Any losses that cannot be covered through sales of the firm's assets will be recovered from the largest financial institutions.
The legislation also creates an agency dedicated to consumer financial protection. The Bureau of Consumer Financial Protection's single goal will be to prevent abusive and deceptive practices and give consumers better transparency. It will be an independent agency within the Federal Reserve.
See also: Ex-FDIC Chair Slams Banking Reform.