As President Trump and the Republican Congress continue their efforts to remove or weaken regulations put in place under the Obama Administration, changes to banking rules may be some of the most consequential. To understand what’s in store for American banking regulations, it’s important to look at their foundation, namely the Dodd-Frank Act that was passed in the wake of the 2008 financial crisis. Much of the current debate over financial regulation stems from the many provisions in Dodd-Frank.  Read on for an overview of three of the law’s most important components and a look at its future.

The Dodd-Frank Act

In the wake of the 2008 financial crisis, Congress passed a law that sought to place additional regulations on banks, improve and unify oversight, and protect consumers in order to prevent another crisis from happening. While the actual success of that law–the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank–continues to be debated to this day, it is responsible for establishing many of the key components of the current regulatory system. The law created many new regulatory bodies that have churned out an even greater number of regulations, but for the purpose of this look, we will focus on three of the main consequences of the law.

Capital Requirements

The general idea behind bank regulations is that bank failures are extremely costly events that can pose serious risks to the entire economy, so we should regulate them to ensure their stability. One of the most universally agreed upon ways to improve the stability of the financial system is requiring banks to hold higher amounts of capital. Bank capital essentially includes all assets that do not have to be repaid, which allow banks to sustain losses if their other assets, like loans, decrease in value. Generally speaking, bank capital includes things like common stock and profits, which are used to fund a bank’s investments. While banks tend to fund most of their business with debt–namely deposits, which are a form of short-term, low-interest debt that is used to fund loans and other investments with higher returns–capital is simply another source of funding that also serves as a stabilizing force if a bank’s other assets decrease in value.

Writing in Slate, Matt Yglesias uses the example of a home loan to illustrate how bank capital works. When buying a home, you typically make a down payment and then fund the rest of the purchase with a loan. That down payment is your ownership or equity in the house–which you own and do not have to repay–and works along the same lines as bank capital. If the value of your house increases then the value of your equity increases. But if the home’s value decreases beyond what you have paid for it, then your loan is considered underwater–meaning you owe more than the house is worth. When the same thing happens to a bank, it becomes insolvent and fails. Higher capital requirements help ensure that banks can still operate when their assets drop in value.

If people chose a bank based on whether or not they viewed it as a safe place to put their money, then it would make sense for banks to have high levels of capital to appeal to customers. But because the federal government insures depositors via the FDIC, a bank’s capitalization matters less to individuals when choosing a bank. As a result, banks are incentivized to increase leverage and risk to increase their returns rather than capital to improve their stability. In return for the federal guarantee, however, regulators require banks to do their share to promote stability by mandating that they hold a certain amount of capital.

Dodd-Frank increased capital requirements in a number of ways. It set a higher leverage ratio–the ratio of a bank’s debt to capital–and created a separate risk-weighted requirement that uses looks at how risky different assets are. Mike Konczal, a fellow at the left-leaning Roosevelt Institute and proponent of Dodd-Frank, argues that both are necessary to ensure stability. A leverage requirement on its own would push banks to maximize their assets’ risk in order to increase returns. And because risk weighting is susceptible to bias, an overall leverage requirement helps act as a backstop in the event that risk estimates are off.

Some argue that requiring banks to fund their business with a higher amount of capital is more expensive for banks, which has effects on the economy as a whole. The thinking goes that forcing banks to fund themselves with capital reduces their ability to make loans and extend credit to businesses, which in turn slows the economy. While proponents of higher capital requirements note that although capital levels are higher than they were before the crisis, they remain low from a historical perspective and argue that the cost of capital is often overstated by banks. Some even dispute the notion that capital is costly for banks and argue that bankers’ opposition to higher capital requirements may have more to do with the way they are paid.

In addition to stricter capital requirements, Dodd-Frank also requires the banks to undergo regular “stress tests” to simulate their ability to handle various crisis scenarios. It also requires the largest banks to submit plans to wind themselves down in the event of a failure and set up a process for the FDIC and the Fed to liquidate a failing bank in order to prevent risk from spreading throughout the system.

The Volcker Rule

While you may not have heard people talk about the Volcker rule specifically, it’s more likely that you have heard someone like Senators Bernie Sanders or Elizabeth Warren discuss the need for Congress to pass a “21st Century version of Glass-Steagall.” Although there are important distinctions between the two, the original Glass-Steagall Act and the Volcker rule target the same issue. Both regulate or prevent banks from using deposits, which are insured by the FDIC, to make what are considered risky or speculative bets for their own gain.

For a better understanding, it’s worth taking a minute to look at the history of banking in the United States. The original Glass-Steagall law was put in place after the Great Depression to put a wall between commercial banks–traditional banks that take deposits and make loans–and investment banks–banks that trade investment securities and help companies issue stocks and bonds. In 1999, that law was repealed, leading to the formation of a handful of very large universal banks that do both commercial and investment banking. While most tend to think that the repeal of Glass-Steagall did not cause the crisis, the mega-banks that it gave rise to certainly played a role–allowing banks to grow quickly and experiment with new financial products likely contributed to the culture or risk-taking and lax regulation that worsened the crisis.

The Volcker Rule, named after former Federal Reserve Chairman Paul Volcker, sought to prevent the new universal banks from engaging in some of the riskiest behaviors of investment banks. Volcker played an important part in drafting Dodd-Frank and focused a lot of his attention on regulating risky bank activities. His eponymous rule sought to stop banks from doing what’s known as proprietary trading–or using their own money to make speculative investments for profit. Essentially, the law sought to mirror some of the effects of Glass-Steagall without breaking up the banks outright, choosing instead to limit the risks that institutions with a commercial banking arm could take. As Volcker sees it, the government has an interest in subsidizing and helping commercial banking with policies like FDIC insurance and potentially even bailouts–because taking deposits and making loans are important functions for the entire economy. However, he also believes that with a government subsidy, banks should not be allowed to take on excessive risk.

The Volcker rule has been criticized from all angles. Banks argue that it amounts to a significant attack on their ability to make profits, while reformers claim that it is full of loopholes and that it doesn’t fully accomplish its own stated goals. And those on the leftmost flank of the Democratic Party argue that the rule, and Dodd-Frank more generally, is not aggressive enough–while regulations under the law are notably more stringent than before the crisis, the government should have broken up the banks and forced larger structural changes onto the financial industry.

It’s also worth noting that the original goal of the Volcker rule was weakened when Dodd-Frank and the resulting regulations were drafted. Several loopholes were included that allow banks to continue to invest a portion of their assets in hedge funds and private equity funds as well as exceptions for trades done on behalf of customers.

The CFPB

When lawmakers set out to revamp financial regulation, they noticed several areas that did not have a single authority in charge–instead, a complex network of overlapping agencies was tasked with creating regulations to accomplish several different goals. A notable example of this was consumer protection, which prior to Dodd-Frank was under the control of about 10 different agencies. The fragmented nature meant that no single agency had a primary mandate to protect consumers, which made it difficult for the government to hold financial institutions accountable in cases where individuals were harmed. As a result, an important part of Dodd-Frank was the creation of the Consumer Financial Protection Bureau, an agency with wide powers to regulate and punish the misconduct of a wide range of institutions. The broad authority and unique structure of the CFPB have made it a controversial component of the reform law, with businesses and conservatives criticizing its authority and accountability structure and progressives arguing that it is essential to keep the industry in check.

The CFPB acts as a regulator in that it creates new rules for financial institutions and punishes them for misconduct. It is also streamlined the complaint process to help consumers take recourse with companies when they have a problem. It created a public complaint database, providing important information for consumers and helping regulators identify common problems. Aaron Klein, a fellow and research director at the Brookings Center on Regulation and Markets, compares the CFPB to Google and Yelp, as it provides a central place for information and reviews to help people make informed choices. In the five years that the CFPB has been in existence, it has provided more than $11 billion in relief for 27 million consumers.

Conclusion

As efforts to undo regulations passed in the wake of the financial crisis gain momentum, it’s important to look back at the law central to the current discussion: Dodd-Frank. Passed in 2010, Dodd-Frank marked the most significant regulatory revamp of the financial system since the great depression. It has been particularly controversial, attacked on the right for going too far and the left for not going far enough. Given its controversial nature, many of the law’s provisions are fairly vague, leaving a lot of latitude for regulators. As a result, the various agencies in charge of creating, updating, and enforcing regulations have a lot of control over how regulation works in practice. Changes to the underlying structure of the law will likely require new legislation, a prospect that does not seem likely given the need for bipartisan support in the Senate. But changes at the margins remain possible and even likely under the new administration. As President Trump continues his efforts to undo regulations and lessen the burden faced by businesses, we may see changes to the Volcker rule or even significant attempts to block its enforcement.

While there are a number of ways that existing laws and rules could be modified in the coming years, it’s important to remember the goals of the law that underlies the current regulatory framework. In many ways, Dodd-Frank was a compromise between various visions of financial reform, including new capital requirements to improve stability as well as the creation of new regulators and a complex set of rules to prevent risky behavior in the largest and most important financial institutions.

Kevin Rizzo

Kevin Rizzo is the Crime in America Editor at Law Street Media. An Ohio Native, the George Washington University graduate is a founding member of the company. Contact Kevin at krizzo@LawStreetMedia.com.

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On Thursday, House Republicans are set to vote on a bill that would significantly repeal or alter major parts of the 2010 Dodd-Frank Act. Enacted in the wake of the 2008 financial crisis, and designed to prevent another meltdown, Dodd-Frank has been a Republican target since it was signed into law seven years ago.

Though the bill that would repeal it is expected to narrowly pass the House, entirely on the backs of Republicans, it faces a much higher hurdle in making it through the Senate, where 60 votes would be required to pass. If all 52 Senate Republicans vote for the bill, at least eight Democrats would have to support it to ensure its passage.

Critics of Dodd-Frank contend it stifled economic growth. Supporters say it helps bring financial security to everyday Americans, and is vital in preventing another recession.

The bill that would undo Dodd-Frank, called the Financial Choice Act, was drafted last year by Representative Jeb Hensarling (R-TX), the chairman of the House Financial Services Committee. Among other provisions, it would allow banks to waive some of Dodd-Frank’s restrictions on lending if they can show a substantial reserve of capital to cover potential losses.

On Wednesday, Speaker of the House Paul Ryan (R-WI), framed the new bill as a way to “rescue” small-town America from federal overreach. He said: “The Dodd-Frank Act has had a lot of bad consequences for our economy, but most of all in the small communities across our country.”

The bill is likely to pass the House despite unequivocal Democratic opposition; Republicans maintain a large advantage in the chamber. To Representative Louise Slaughter (D-NY), Republicans who support the Choice Act are “ignoring the past” and “endangering the future of millions of Americans.” She added: “Dismantling the law will force consumers to go it alone against Wall Street.”

The Choice Act will also weaken the powers of the Consumer Financial Protection Bureau, an agency that was formed after the 2008 crisis. Under the new law, the president would have the authority to unilaterally remove the head of the agency, and many of its oversight functions would be reduced. The law might also gradually reduce the federal deficit. According to a Congressional Budget Office analysis, the legislation would lower the deficit by $24.1 billion over a decade.

Still, Democrats see the bill as a direct rebuke of President Donald Trump’s promises to reign in Wall Street. “The Wrong Choice Act is a vehicle for Donald Trump’s agenda to get rid of financial regulation and help out Wall Street,” said Representative Maxine Waters (D-CA), the ranking Democrat on the Financial Service Committee. “It’s a deeply misguided measure that would bring harm to consumers, investors and our whole economy.”

Alec Siegel

Alec Siegel is a staff writer at Law Street Media. When he’s not working at Law Street he’s either cooking a mediocre tofu dish or enjoying a run in the woods. His passions include: gooey chocolate chips, black coffee, mountains, the Animal Kingdom in general, and John Lennon. Baklava is his achilles heel. Contact Alec at ASiegel@LawStreetMedia.com.

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Millennials were teenagers or young adults when the worst financial crisis since the Great Depression hit, and our lives since have been marked by it. The crisis has been blamed, whether correctly or incorrectly, for everything from our growing student loan debt to our refusal or inability to buy houses. As a result, there’s long been a sense of “never again.” Millennials in particular have expressed a desire for corporate responsibility and to work for ethical companies.

And the American pushback against the 2008 financial crisis has led to an increase in regulations that financial institutions are held to. As a result, there’s been an increased need for compliance officers. It’s one of the fastest-growing fields within financial services, and Boston University School of Law recently launched a Certificate in Financial Services Compliance program to help you get started. The certificate program is housed in the School of Law’s Graduate Program in Banking & Financial Law, the oldest banking LL.M program in the country. Read on to learn more about the need for financial compliance officers and how BU Law could set you up for a rewarding, compelling, and fulfilling career in the field.

Financial Compliance Officers Wanted

Financial compliance officers essentially make sure that the institutions they work for play by the rules, and they’re currently in high demand. It was estimated by the Bureau of Labor Statistics that between 2008-2018 the total number of compliance officers will increase by 31 percent–a notable jump from 260,000 to 341,000. They’re employed by financial services institutions, corporations, and consulting firms. Many companies created new positions and allocated new budgets to account for this increased need. While demand has slowed down somewhat from the initial rush after the financial crisis and subsequent passage of increased regulations, it’s still a field that’s poised to see steady growth for the next few years.

So where do all these new financial compliance officers come from? Lawyers, especially those who have backgrounds that involve experience with regulatory mechanisms like the Dodd-Frank Act, are desirable. And so are other players in the financial sector, especially when they are able to gain that knowledge of regulations, and learn how to guide their institutions in their compliance with them.

It’s Complicated: The Dodd-Frank Act

One of the reasons that financial compliance officers are in such high demand is because of the rise in regulations after the financial crisis. In the 1980s there was a trend of deregulation on the part of the U.S. government when it came to financial institutions. In 2007 and 2008, when the financial crisis began, that deregulation was blamed by some.

So, when the question of “how do we make sure this never happens again” was raised, stronger financial regulations quickly materialized as one of the answers. In 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act–best known as just the “Dodd-Frank Act”–was passed and signed into law by President Barack Obama. The act massively changed the face of financial regulations in the United States, including attempting to prevent banks from growing so large that they’re deemed “too big to fail.” New regulations wrapped into Dodd-Frank mandated things like how much money certain kinds of banks need to keep in reserve and subjected many of them to stress tests to ensure they could survive another crisis. It created a whole host of new agencies to oversee financial institutions, and reformed many parts of the financial system as a whole.

Put simply: Dodd-Frank created a lot of new rules and tests for banks and financial institutions. According to Thompson Reuters, at one point in 2013, 110 regulatory changes happened each day. Financial compliance officers are tasked with keeping on top of these constant changes, and they need to be up to the task. As James Scott, director of BU Law’s Graduate Program in Banking & Financial Law points out:

Perhaps more important than the growth in the number of compliance personnel required in the area of financial services is the greater demand for professionalism. The scope of substantive knowledge required, as well as the increased breadth of risk management, monitoring and testing, policy drafting and implementation and training of business personnel has resulted in a dramatic rise in the professional stature of financial institution compliance officers.

Why is BU Law the Right Place to Study Financial Services Compliance?

BU Law recently announced a new certificate in financial services compliance; the program will begin with its inaugural class in Fall 2017. Here are some of the benefits:

A World Class Faculty and Program 

BU Law is home to the only financial services LL.M program in the United States that has its own faculty and curriculum. The new certificate is housed within that program. The faculty includes James E. Scott, who has had a long and impressive career working in banking and regulatory law. Scott is the Director of the Banking and Finance Law Program.

Online and Part Time 

The 12-credit program is part time and the classes are partially or completely online, so you don’t have to be in Boston to take advantage of the opportunity. There’s flexibility in the program too–students can complete it in two or four semesters, depending on their schedules. And the classes are offered asynchronously, meaning that a student can complete course work like lectures and assignments according to their own schedules. All of this makes it ideal for a working adult–someone who has a background in law, in financial services, or in a related field–to add to their resume while continuing their career.

Conclusion

Financial compliance officers are in high demand. It’s also a rewarding and challenging job–its growth was spurred on by the financial crisis of 2008 but continues to be a needed role in many companies. Getting a certificate in financial services compliance could be the next step you need to get started–and BU Law offers the perfect fit for someone with a law degree or related experience in the financial services field. Get more information here:

Resources

Primary

Bureau of Labor Statistics: Employment Projections: 2008-18 News Release

U.S. House of Representatives: Dodd-Frank Act

BU Law: BU Law Launches Certificate in Financial Services Compliance 

Additional

NPR: Corporate Ethics In The Era Of Millennials

Financial Times: The age of the compliance officer arrives

New York Times: Reagan Did It

CNBC: Dodd-Frank Act: CNBC Explains

Quartz/Thomson Reuters: How the rise of modern regulation is changing the finance industry

Boston University School of Law

Boston University School of Law is a top-tier law school with a faculty recognized nationally for exceptional teaching and preeminent scholarship. At BU Law, you can explore virtually any area of the law in 200+ classes and seminars, 21 clinics, externships, and practicums, 21 foreign study opportunities, and 17 dual degrees. You’ll also be part of a supportive, collegial law school community while experiencing the professional, social, and cultural opportunities that the city of Boston has to offer. Boston University School of Law is a partner of Law Street Creative. The opinions expressed in this author’s articles do not necessarily reflect the views of Law Street.

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