Dodd-Frank Act Two-Year Anniversary

As we approach the two-year anniversary of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), it’s worth pausing for a moment to take stock of how it has already influenced the financial services and banking industries, and what may lie ahead. Today, its full impact remains to be seen – financial services institutions are still grappling with the enormity and complexity of the 2,300-page law. And regulators from numerous federal agencies are still writing many of the rules that are anticipated to affect different corners of the industry, which may contribute to uncertainty.

At the same time, after two years its impact in areas where the rules are final has become clearer. For example, Dodd-Frank requires certain financial institutions to develop and submit detailed annual resolution plans – commonly known as “living wills” – for their own orderly dissolution in the event of a potential financial distress or failure. This is a key part of regulatory efforts to guard against the systemic impact of a large institution failing. The living wills rule affects bank holding companies with $50 billion or more in assets and eventually certain nonbank financial institutions designated to be systemically important, such as large insurance companies. Under these plans, institutions covered by the living wills rule would need to demonstrate the ability to wind down their entire business (or parts of it) with minimal disruption to the larger financial system. But uncertainty lingers when it comes to how detailed these plans should be and what types of data requirements and resources will be needed.

For financial services executives working to understand where they should be focusing when it comes to living wills, here are five important observations.

How will regulators respond to living wills?

Institutions with more than $250 billion in total nonbank assets submitted their recovery and resolution plans on July 1, 2012. However, they are concerned about the level of interaction, feedback, and questions that regulators – namely the Federal Deposit Insurance Corporation and Federal Reserve – will provide in response. If an institution doesn’t submit a credible plan, regulators could go as far as imposing more stringent capital or liquidity requirements under the statute, which could lead the institution to divest assets or operations that pose a risk.  Although institutions likely won’t face such actions with their initial submissions, they still need to keep this in mind this possibility as they go through this process.    

While the largest institutions are uncertain about regulatory reaction, it’s likely that the other two groups that must submit plans next year will benefit from this initial scrutiny. Institutions with $100 billion or more in total nonbank U. S. assets must submit plans by July 1, 2013, while all other covered companies have until December 31, 2013 to provide such plans. While these two groups may still have questions on issues such as the level of detail in their plans, they may benefit from the first wave of institutions going through the process. Plus, regulatory agencies will have more experience in dealing with the plans and will likely provide better feedback.

Confidentiality and public disclosure

Covered financial institutions are concerned about the confidentiality of their resolution plans and want them exempted from the Freedom of Information Act to avoid public disclosure. However, the rules attempt to balance this desire for confidentiality with public demands for transparency and these plans will contain both confidential and public sections. Institutions are also concerned about potential legal challenges to the confidential portions of their living wills.

Significant investments in data-management

New data requirements for living wills are particularly challenging for institutions. These institutions have complex legal entity structures and many shared assets and services across their lines of business and product lines. To handle this challenge, they will need a robust data-management framework to provide information on products, lines of business, personnel, systems, facilities, and contracts. They will need to slice and dice this information in a variety of ways – by line of business, legal entity, or operational group – for reporting purposes. Therefore, institutions should enhance their data management capabilities to increase accuracy and timeliness. This could also improve operations by identifying redundancies that can be streamlined.

Ongoing compliance requires dedicated resources

Submitting a living will is not a one-off process. Regulators require all institutions covered by the rule to annually refresh their plans. This includes reporting changes in their workforce, processes, and technologies (and the resulting impact to data). This will require focused training, communication, and personnel familiar with the living wills program.

Opportunities beyond mere regulatory compliance

Institutions should consider leveraging their living will exercise to generate strategic value.  Analyzing data attributes collected across their organizations can provide a new cost/benefit perspective on their investments. Institutions might rationalize legal entities, renegotiate third-party contracts, enhance operational transparency, or even raise risk management practices involving their reputation, credit, or operations.

Because there’s a lot more to know about the Dodd-Frank Act, these takeaways are presented as part of a series of issue-focused insights into the impact of this legislation. Deloitte has released in-depth look at the law’s potential implications in other areas such as compensation, stress testing, consumer protection, derivatives, and the Volcker Rule. For more information, please visit us at Financial Regulatory.

To learn more, please contact:

Larry Albin
Principal
Deloitte Consulting LLP
+1 212 313 1600

John Corston
Director
Deloitte & Touche LLP
+1 202 378 5012

Doug Finn
Principal
Deloitte & Touche LLP
+1 212 436 4441

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