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Dodd Frank Act

The Dodd Frank Act is the “largest single piece of financial reform legislation in the nation's history.”1 With the 2300 page Dodd Frank Act, the Banking and Financial Services Industry finds itself at a juncture where the next few years will see an estimated 20,000 pages of new rules and compliance mandates being enforced on them. The sheer magnitude of this rulemaking exercise, by existing and new oversight authorities (FSOB, FRB, FIO etc.), will create a very challenging yet unavoidable governance environment for Banks and Non-Banks alike. The core purpose of this act is to avoid a repeat of the shocking realities of the financial crisis in 2008 by promoting “the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”2

Pursuing this primary objective, the Dodd Frank act mandates multiple changes in the current industry best practices around risk, capital, liquidity, compliance and governance. Though the Dodd Frank Act is still evolving with many aspects of the legislation still undefined, many of the reforms and implementation issues still unclear. However, what is evident is that the new regulation implies substantial alterations in the entire business structure of financial institutions including operations, IT infrastructure, corporate governance, internal control frameworks, risk management, tax planning, regulatory and public disclosures, ethics, legal and compliance.

Some of the primary provisions3 of the act are clearly,.

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Dodd Frank Act: Understanding and Implementing the Act

Increased Regulatory Supervision
The act creates new federal regulatory authorities and enhances the roles of existing regulators to increase regulatory supervision for Banks and Financial Institutions. This increased regulatory supervision is aimed at providing regulators with a macro-perspective of emerging risks, authority to manage threats, regulate potentially dangerous consumer financial products and ensure overall stability of the financial system.

New Operating Restrictions
Bring forth a number of restrictions on various risky operational activities such limits on proprietary trading and OTC derivatives, interchange fee limits and mandatory retention of at least five percent of many securitizations (qualified residential mortgages expected).

Improved Firm Governance
Incorporated mandates around risk management requirements such as annual stress testing, rapid liquidation plans for failed financial institutions, increased public disclosures and investor protection measures like shareholders vote of executive compensation.

More Stringent Standards
Institutionalize stringent standards around higher capital levels, definitions of eligible capital, liquidity requirements, leverage limits and capital requirements.

Higher Regulatory Cost
Regulations around changing the assessment base for FDIC deposit insurance, shared industry responsibility for liquidation cost of large financial organizations and many new fees introduced by the act would significantly increase the regulatory cost for Banks and Financial Institutions.

These core provisions of the act, targeted at making improvements to the current industry best practices, would result in both short term and long term impacts, namely,

Higher focus of Governance, Risk and Compliance Management
Banking and Financial services Institutions would have the greater resilience and stability to withstand future economic crisis due to stronger governance, risk and compliance practices resulting in higher capital and liquidity levels.

Reduced exposure to systemic risk
Lower cumulative leverage and higher liquidity buffers coupled with stronger and integrated risk management views would reduce the exposure to systemic risks for Banking and Fianncial Services Institutions.

Additional Consumer Protection
Greater transparency would reduce the risk to consumers from misleading products and services.

Improved market efficiency
Due to comprehensive broker-dealer regulations and enhanced accountability on behalf of rating agencies the transparency for transactions would improve resulting in improved market efficiency.

Increased stability of the macro economy
The stability of the macro economy would increase due to the improved resilience of banking and financial institutions thus reducing the breadth of future recessions.

Beyond these intended impacts of the Dodd Frank Act, Banking and Financial Services Institutions would have to understand and respond to some of the latent implications of this game changing regulation,

Reduced profitability
Reduced financial flexibility coupled with additional capital and liquidity requirements will result in increasing pressure on the profitability of Banking and Financial Institutions.

Increasing cost of compliance
The sheer volume of rules and regulations in the Dodd Frank act would increase the compliance overhead and significantly impact the compliance cost at large banks and non banks alike.

Potential shift of capital and business activity
The Dodd Frank act goes beyond the issues of G20 and therefore may put banks under its purview at a competitive disadvantage in internationally competitive lines of business.

Moderation of long term growth prospect
Reduced appetite for risky products and aversion to segments with poor credit performance will result in decreased credit availability for consumers and enterprises. This in turn would reduce the long-term growth prospects of the banking and financial services institutions.

MetricStream has been proactively working with several of our large and mid-tier Banking and Financial Services Clients, helping them in understanding the new legislation and its implications for financial organizations, upgrading their risk and regulatory compliance capabilities, enhancing customer accountability and implementing new regulations quickly. MetricStream has aligned its solution to provide a common framework and an integrated approach to manage various aspects and requirements of the new legislation efficiently. Integrated on the MetricStream GRC platform, the solution provides automated, streamlined and centralized workflows, processes, and control testing and reporting requirements specific to the Dodd-Frank Act.

The common platform and centralized information facilitate collaboration among business units and functions and increase transparency of the entire process of managing Dodd Frank Act across the enterprise. The common platform and the capabilities woven around it allow organizations to introduce and foster a culture of increased customer accountability. Covering various facets of Dodd-Frank Act, MetricStream Solution includes workflows, capabilities and integrated framework for:

  • Complete compliance with Dodd-Frank Act
  • Management of risks arising out of non-compliance with the act
  • Regulatory intelligence for continuous awareness and up-to-date visibility into the new rules, regulations, changes and developments in the legislation
  • Content management to track documentation, policies, certifications, reports that are part of managing Dodd-Frank Act

The MetricStream GRC platform has been deployed by several large global to mid-tier financial organizations including central banks, federal financial agencies, asset management firms, retail banks, broker-dealer firms, investment companies, stock exchanges, clearing corporations, insurance companies among several others.

Follow us here as we discuss and elucidate the various implications of the act on governance, risk and compliance practices for Banking and Financial Services Institutions through our “Consequences of Dodd Frank” series, webinars with industry experts and case studies on current implementations.


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