Primer: Six Things Happening Right Now With Financial Regulation

By Marion Wang, ProPublica Reporter

News about the Dodd-Frank financial reform legislation has come in smatterings. We’re well aware that there were people who weren’t impressed with its strength when it passed, and much of the bill leaves a lot still to be determined by regulators in subsequent rulemaking (By one law firm’s count [PDF], it requires 67 studies and 243 new rules to be created). And that leaves us with many moving parts, so here are a few—in motion right now—that pique our interest:

Regulators discuss how to shift away from reliance on credit rating agencies.

Credit rating agencies played a critical role in the financial crisis. Triple-A ratings on risky subprime mortgage-backed securities—later downgraded to junk status—indicated just how easily the three major rating agencies, hungry for market share, were pressured into handing out ratings that were influenced by the wishes of big banks.

This week, regulators met to discuss how to meet a mandate in the Dodd-Frank financial reform legislation requiring that regulators stop relying on rating agencies to gauge the amount of capital banks must hold in case of big losses. They have a year before they must implement alternative measures.

But according to The Wall Street Journal, that discussion about alternative measures—which has now been opened for public comment—is holding up efforts to craft new capital standards for banks, which “will likely prolong uncertainty” for at least a year.

And regulators seem uncomfortable about the switch—Comptroller of the Currency John Dugan said he worried that “there is a little bit of throwing out the baby with the bath water,” while FDIC Chairman Sheila Bair said finding “a better substitute will not be simple.”

The FDIC is restructuring.

On Tuesday the FDIC announced it was creating new divisions to comply with financial regulation requirements.

Under the new structure, the Office of Complex Financial Institutions will review bank holding companies “with more than $100 billion in assets as well as non-bank financial companies designated as systemically important,” according to the FDIC.

It will also be responsible for liquidating both bank holding companies and non-bank financial companies that are failing—in hopes of preventing future bailouts. Previously, the FDIC helped wind down some failing banks, but did not have the authority to do so for other big financial firms, such as Lehman Brothers.

Another new FDIC division, the Division of Depositor and Consumer Protection, will focus on consumer protection and enforcement for banks with $10 billion or less in assets.” (There’s also a new consumer protection bureau housed in the Federal Reserve, but we’ll get to that.)

The Consumer Financial Protection Bureau is still headless.

There’s still no official word on who will lead this agency, but there’s been tons of speculation that it could (or should, according to a lot of people) be Elizabeth Warren, the Harvard University law professor and bailout watchdog who’s advocated for such an agency from the beginning.

She’s a candidate, and she’ll definitely have a role, the Treasury made clear last week. But no decisions had been made on size or budget yet, reported Reuters.

The big banks are contemplating the most profitable way to comply with the Volcker Rule.

A provision in the Dodd-Frank bill called the Volcker Rule requires that banks limit their proprietary trading and investments (that is, the extent to which they can make bets with their own money), and many banks are already working on finding “the best and most profitable way”—in the words of the Los Angeles Times—to comply with the new requirement.

The Wall Street Journal reported last week that Morgan Stanley may soon be selling off most of FrontPoint, its in-house hedge fund, making it “one of the first high-profile overhauls” caused by the new regulation. According to the Journal, Morgan Stanley will likely bring its full ownership of FrontPoint down to somewhere between 20 and 25 percent.

Goldman Sachs is also reported to be considering several methods of breaking up its lucrative proprietary trading desks. Fox Business earlier reported that one of the methods at Goldman’s disposal is to move its proprietary traders into its asset management division, where the traders could still take bets “simply by labeling a trade ‘customer- related.’” (Goldman spokesman Lucas van Praag told The New York Times: “We are reviewing our options and will, of course, comply with the new legislation.”)

Proprietary trading and private equity investments account for roughly 10 percent of Goldman’s revenues, according to the Financial Times—“a higher percentage than its rivals.” But according to the L.A. Times, top Goldman executives have privately told analysts that the bank did not expect financial reform to cost it revenue—highlighting concerns about how effective this rule will actually be in limiting banks’ risky bets.

The banks have years to comply with the Volcker rule, but by most accounts, Wall Street has been fast to move, leaving many asking why.