Regulatory Topics: Dodd Frank Wall Street Reform &

Consumer Protection Act

Carol T. Adams, CTP

Managing Principal

Regulatory Topics: Dodd-Frank Act

• By the 1830s, a few states enacted “free banking” laws to get away from the politicization and corruption involved in legislative chartering

• After stops & starts, the Federal Reserve Act of 1914 became the centerpiece of banking legislation

• Today, we have enough regulations to make an alphabet soup from the letters “A to FF”

Regulatory Topics: Dodd-Frank Act

• The Dodd-Frank Act has its roots in 1933’s Glass-Steagall Act

• It’s estimated that the Repeal of Regulation Q alone will put $21 billion of bank profits at risk

• There are over 500 new rules to cover things not resolved by the legislation itself, written by 11 agencies

• The legislation’s printed 2,300 pages weighs in at six pounds

Dodd-Frank Wall Street Reform &Consumer Protection Act

Goal -• Create a Sound Economic Foundation to Grow Jobs• Protect Consumers• Rein in Wall Street and Big Bonuses• End Bailouts and Too Big to Fail• Prevent Another Financial Crisis

Highlights: Dodd-Frank Act

• Consumer Protections with Authority and Independence– Creates a new independent watchdog, housed at

the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.

Highlights: Dodd-Frank Act

• Ends Too Big to Fail Bailouts– Ends the possibility that taxpayers will be asked to

write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.

Highlights: Dodd-Frank Act

• Advance Warning System– Creates a council to identify and address systemic

risks posed by large, complex companies, products, and activities before they threaten the stability of the economy.

• Transparency & Accountability for Exotic Instruments– Eliminates loopholes that allow risky and abusive

practices to go on unnoticed and unregulated -- including loopholes for over-the-counter derivatives, asset-backed securities, hedge funds, mortgage brokers and payday lenders.

Highlights: Dodd-Frank Act

• Protects Investors– Provides tough new rules for transparency and

accountability for credit rating agencies to protect investors and businesses.

• Enforces Regulations on the Books– Strengthens oversight and empowers regulators to

aggressively pursue financial fraud, conflicts of interest and manipulation of the system that benefits special interests at the expense of American families and businesses

Highlights: Dodd-Frank Act

• Executive Compensation and Corporate Governance– Provides shareholders with a say on pay and

corporate affairs with a non-binding vote on executive compensation and golden parachutes.

Buh-Bye Reg Q (for real)

• R.I.P. Reg Q – July 21, 2011• Strategically circumvented for years, banks can

legally pay interest on demand deposit business checking for the first time in 75 years

• No double-dipping -- Corporations choose:– FDIC coverage of $250,000 on interest-bearing

balances– Full FDIC coverage on non-interest bearing balances

Impacted Commercial Banking Products & Services

• Checking• Over-the-counter derivatives• Investment Sweeps• Earnings Credit Rate• Other Cash Management Services• Account analysis statements

Buh-Bye Reg Q: Customer Postures

“A virtual non-event – not changing what we’re doing in the near future.”

“This may make leaving money at the bank more appealing than transferring to money market funds.”

“We’re going with the best overall deal that makes sense for our

bottom-line.”

“Our sweep structure is too embedded in what we’re doing to change it.”

“We’re going to balance interest earnings vs. ECR and determine what is best for now.”

Customer Perspectives

Assessing Impacts – • Discussing Reg Q with Bankers & Fund Managers• Tracking FDIC fees to get a baseline• Examining rate scenarios to see where portfolios may

be re-balanced• Determining whether ZBAs, Investment Sweep, and

Cash Concentration products still make sense• Sizing up instrument mix• Understanding counterparty risk tolerances• Worrying about the trickling down of costs

Bank Perspectives

Assessing Impacts – • Concerned about profits (commercial’s 80/20 rule)• Mix of balance sheet funding• Modeling the money

– Interest expense could be a moot point, given sweep rates

– Exposure for lost non-interest revenue, as businesses exit sweep products for vanilla interest checking

– Higher cost of funds

Bank Perspectives

Assessing Impacts – • Understanding the best customer mix to attract/retain• Identifying system limitations to applying, tiering, and

managing interest rates by product• Sizing up the competition, including fund companies

Bank Perspectives

Assessing Opportunities – • Building knowledge on the sensitivities of their

customer base• Testing products, e.g. hybrid checking which pays

interest on balances above the level to compensate for service fees

• Getting a leg up on the competition, especially community banks eyeing “big boy bank” customers

Key Questions

• How and which customers will be impacted most?• What is the most effective way to comply with new

regulation?• Who are the key internal stakeholders needed to

collaborate and execute?• What other sources of revenue exist to compensate

for any negative effects of the regulation?• When will you execute your plan?

Dodd-Frank: FDIC Assessments

• Effective April 1, 2011 and reflected on June 30th invoices due in September.

• “Base assessment amount” was based on domestic deposits – now it will be:

Banks Total Assets minus Tangible Common Equity

• The bigger the assets, the more the increase – small & community banks not as impacted as “big boy banks”

Regulatory Topics: On the Horizon

• Dodd-Frank Act directed the FDIC to study how core & brokered deposits are defined, their role in the economy and whether they should be reclassified relative to stability or volatility. Roundtable on March 18th, with comments collected through May 1st.

• Compelling testimony was given on March 7th by ICBA on the impacts of Dodd-Frank on community banks

• As many as 300 regulations are to be issued during the next five years. Each will be published in draft form and put out for public comment.

Sources Cited

• Dodd-Frank Regulatory Calendar –http://www.bankersweb.com/dodd-frank

• FDIC’s Official Site on Dodd-Frank –

http://www.fdic.gov/regulations/reform/initiatives.html• On the Horizon –

http://www.fdic.gov/regulations/reform/coredeposits.html

For More Information

www.redknotresources.com

Carol T. Adams, CTPManaging Principal

carol@redknotresources.com