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Making History: Regulatory Reform Enacted

In 1933, “King Kong” was taking movie theaters by storm. The New York Giants won the World Series. A couple of dollars would fill up your gas tank. But money for the movies, a seat in the ballpark, or a Sunday drive was a luxury few could afford during the depths of the Great Depression. Jobs were scarce and the unemployment rate reached 25 percent. Bank runs and bank failures had disrupted the banking system and devastated the public's confidence. President Franklin Roosevelt responded by signing the Banking Act of 1933, which laid a solid foundation on which to rebuild the country's financial system.

In the years since, Congress has passed other legislation related to the financial services industry — the Banking Act of 1935, the Monetary Control Act of 1980, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, and the Gramm-Leach Bliley Act of 1999, to name a few. But, arguably, since 1933, Congress has passed no other law as broad in scope in direct response to a financial crisis — until 2010.

Enter the Dodd-Frank Wall Street Reform and Consumer Protection Act, a comprehensive piece of legislation signed into law on July 21, 2010. Congress passed the law to improve accountability and transparency in the financial system and to protect consumers and investors from abusive practices in response to the worst financial crisis since the Great Depression. At the Philadelphia Fed, President Charles Plosser led the Bank's efforts to address regulatory reform by sharing his ideas, through speeches and meetings with legislators, on how to achieve effective reform. As Congress debated various reform measures, President Plosser spoke out on the importance of preserving the Fed's independence and its regional structure, which has served the nation's economy and its banking system for almost 100 years.

Soon after the Dodd-Frank Act passed, the Federal Reserve set up Systemwide working groups to determine how the Fed should marshal its resources to best meet its new responsibilities related to ensuring financial stability, conducting supervision and lending, managing systemic bank failures, and improving consumer protection. Several officers from the Philadelphia Reserve Bank participated in these groups.

Executive Vice President and Director of Research Loretta Mester served on the five-member Steering Committee. Robert Hunt, vice president and director of the Payment Cards Center, contributed to the System's consumer protection working group by assessing the potential market effects of proposed rules. Vice President Mitchell Berlin, who oversees the Research Department's Banking and Financial Markets section, worked with the resolution authority group, which looked at issues related to too big to fail. Berlin was also a member of the work group evaluating alternative levels of disclosure for the stress tests.

Significant Supervision Changes

Some of the most significant changes mandated for the Fed are in its supervision of banks and banking organizations. Dodd-Frank requires that the Fed work with other regulatory agencies to recognize risks to overall financial stability, not just individual firms.

Federal Reserve Initiatives Under Dodd-Frank

The Fed has always worked closely with federal and state agencies to supervise and regulate banks to ensure the safety and soundness of about 8,000 insured depository institutions nationwide. The Fed supervises about 850 state-chartered member banks and under the authority of the Bank Holding Company Act of 1956, about 5,000 bank holding companies (BHCs). The Philadelphia Fed will continue to supervise more than 100 BHCs and 20 state member banks.

Dodd-Frank shifts some supervisory responsibilities away from the Fed and its fellow regulators, abolishes the Office of Thrift Supervision, and extends the Fed's responsibilities to include the supervision of thrift holding companies, also known as savings and loan holding companies.

For the Philadelphia Fed, this means responsibility for an additional 34 thrift holding companies, including oversight for the largest thrift holding company in the country. To help manage the additional workload, Philadelphia is hiring more bank examiners.

Under Dodd-Frank, the Fed is also required to examine nonbank subsidiaries of holding companies if the subsidiary offers traditional bank services. In fact, the law also requires commercial companies that own industrial loan companies or industrial banks, which are not supervised by the Fed, to have an “affirmative commitment” to serve as a source of strength for the bank.

The Government Accountability Office is taking a closer look at these commercial companies that own banks, yet aren't subject to regulatory oversight to determine improvements.

Financial Stability Oversight Council

To address the issue of systemic risks, Dodd-Frank calls for the creation of the Financial Stability Oversight Council. The council will consist of 10 voting members who are federal financial regulators, including the Federal Reserve, plus an independent member from the insurance industry and five nonvoting members.

The council's work will be supported by the new Office of Financial Research. Housed within the Treasury, this unit will be staffed with economists, lawyers, and other specialists who will collect financial data and conduct economic analyses.

In November 2010, Vice President Leonard Nakamura of Philadelphia's Research Department led a cross-department effort to create a financial stability report and briefing process for the Bank's senior management. The report, which focuses on developments in consumer credit markets, is being shared with the Board of Governors' Office of Financial Stability Policy and Research. The analysis presented in the report is contributing to the Board's monitoring of systemic risk.

Consumer Financial Protection Bureau

Dodd-Frank makes significant changes to the federal consumer protection regulatory role by creating the Consumer Financial Protection Bureau. The bureau will be housed within the Fed for purposes of funding its budget but will be independent of the Fed in terms of its decision-making authority. Congress created the bureau to consolidate consumer protection functions for financial services into one agency. Until Dodd-Frank, the Fed had authority to write regulations to implement most federal consumer protection laws, such as the Truth in Lending Act (TILA).

Under Dodd-Frank, the rulemaking authority for most of these laws will transfer to the bureau effective July 21, 2011. The bureau will have authority over a vast array of consumer protection laws, including TILA, the Real Estate Settlement Procedures Act (RESPA), the Equal Credit Opportunity Act, the Truth in Savings Act, and the Fair Credit Reporting Act. Dodd-Frank also directs the bureau to create a disclosure form that combines the existing mortgage disclosures under TILA and RESPA. This combined rule will reduce the paperwork consumers receive in mortgage transactions and help consumers better understand the costs of their mortgage and the cost of loan-closing services. Dodd-Frank also directs the bureau to conduct consumer testing of its disclosure forms to ensure that the information is understood and to examine whether mandatory arbitration clauses in consumer contracts should be banned.

While most consumer protection rulemaking powers will transfer to the bureau, authority for enforcing compliance with a few laws, including the Community Reinvestment Act (CRA) and the Fair Housing Act, will remain with the Fed and other existing federal agencies.

Bureau's Examination Authority

The bureau will examine and supervise all banks, savings and loan associations, and credit unions with assets of $10 billion or more (approximately 103 institutions) to verify their compliance with federal consumer protection laws and to investigate consumer complaints. The Philadelphia Fed expects that consumer compliance examinations for only one of its 20 state-member banks will be transferred to the bureau. These institutions' existing regulators, which include the Fed, will continue to supervise them for safety and soundness and will continue to conduct CRA exams.

One of the most significant changes resulting from Dodd-Frank is that the law requires the bureau to examine and supervise certain nonbanking institutions, including mortgage brokers, providers of foreclosure relief service, payday lenders, providers of private education loans, and large providers of consumer financial services. Currently, the Federal Trade Commission can take action against these institutions for violating consumer protection laws but does not examine them or investigate individual consumer complaints.

Rule-Writing Responsibilities

To meet their rule-writing responsibilities, the Fed and other regulatory agencies will solicit views from the financial industry, academics, and others to ensure that the key issues relevant to Dodd-Frank are implemented. The Fed is working with these agencies to write hundreds of new rules — both mandatory and discretionary. The Fed has direct responsibility for writing more than 50 rules.

Federal Reserve Initiatives Under Dodd-Frank

The work is already under way. Julia Cheney, manager of research and programming for the Payment Cards Center, has been assisting the Board of Governors in Washington, D.C., in writing rules governing “reasonable and proportional interchange fees” charged for debit transactions. Her primary focus has been on the fraud adjustment portion of the rule. Her work ranges from assisting in the design of the surveys sent to market participants to evaluating the data received.


Throughout the Federal Reserve System, more than 300 staff members are working on Dodd-Frank-related projects. The new law's effectiveness will depend on the interpretation and implementation. The Philadelphia Fed will continue to contribute to this work, which will lead to a better understanding of financial firms and emerging risks, improved transparency and accountability, and increased protections for consumers. The ultimate goal is to improve the strength and effectiveness of the nation's regulatory system and enhance financial stability.