July 2015 marked five years since President Obama signed the Dodd-Frank bill into law. We would like to acknowledge the anniversary by taking an objective look into the impacts of the mandate forged in the aftermath of the 2008 financial crisis in an effort to reform the financial services industry. Below we outline the major objectives of Dodd-Frank and some of its impact to date, as well as highlight how MCG can help your firm fine-tune its strategy to meet regulatory requirements.
Goals of Dodd-Frank
Limits on Big Banks
A major objective of Dodd-Frank is to prevent ‘too big to fail’ banks from failing. Today, big banks are bigger than ever before. In the five years since the bill’s passing, assets of the financial services industry have grown by 30%—more than half of these are controlled by the top five banks. However, it can be argued that today’s banks are safer due to stricter capital requirements and recurring stress tests. Banks’ assets now exceed liabilities and profitability has improved.
Market Transparency
Another major goal of Dodd-Frank is to ensure transparency and stability in financial markets, specifically in the historically complex and opaque OTC market that was largely blamed for the financial crisis. OTC market participants are now required to clear trades though Swap Execution Facilities (SEFs), bid/ask prices for OTC derivatives are made publicly available, and regulators can review transaction data through Swap Data Repositories (SDRs). As more OTC products are cleared through central clearing houses, investment risks on banks’ books are becoming better understood by the financial community.
Consumer Protection
When it comes to consumers, Dodd-Frank’s aim is to reform the credit card and mortgage businesses to prevent the abuses of the past. Lenders now provide more disclosures to potential borrowers who, in turn, have additional rights. However, while interest rates remain at historic lows, mortgages are still difficult to obtain for the average American. This is due to the fact that many credit unions and community banks have closed or merged, while those that weathered the storm intact are now hesitant to lend to small businesses.
Outcome
Perhaps it is still too early to conduct a comprehensive review of the effect of Dodd-Frank. The impacts of the repeal of the Glass Steagall Act[1] weren’t clear for years. Nonetheless, the financial services industry has adopted a new focus as a result of these regulations—increasing regulatory and compliance spending and implementing measures to reduce costs and improve margins.
What’s Next?
Although much has already been done, our work is far from complete. Of the 390 required directives of the Act, just 238 have been completed to date[2]. One of the most recent rules, Volcker—which prohibits banks from conducting certain investment activities and limits their ownership of covered funds—just went into effect this past July. It could bring on one of the most impactful changes yet, as there are already liquidity concerns in the bond market due to the rule’s trading restrictions.
How Can MCG Help?
Our MCG Regulatory Reform Team helps our capital markets clients comply with these regulations. By simplifying complex regulatory requirements and creating structured processes to fulfill them, we assist our clients in achieving their operational and technical goals. In the past several years,
MCG has been successful in implementing real-time transaction reporting, registering financial entities as swap dealers, establishing Volker Rule compliance, and interpreting clearing requirements for SEF trading.
In this newsletter, we highlight some of MCG’s recent initiatives and explain how we can use our time-tested best practices to aid your organization. We also showcase some analytical functions that can help executives to project future trends for their businesses. To learn how MCG can assist your firm in complying with new regulations and improving operational efficiencies, please contact us today.
[1] The Glass-Steagall Act of 1933 separated investment and commercial banks’ permitted activities.
[2] Davis Polk & Wardwell LLP – a law firm that focuses on Dodd-Frank implementation.