Choosing a Bank under the Dodd-Frank Rule
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd-Frank, is a massive piece of financial reform legislation passed by the Obama administration in 2010 as a response to the financial crisis of 2008.
The Act’s numerous provisions, set forth over thousands of pages, are scheduled to take effect over a period of several years and are intended to decrease numerous risks in the U.S. financial system. The Act established a number of new government agencies tasked with overseeing various components of the Act.
Dodd-Frank and Your Deposits
Critics of Dodd-Frank believe that the Act will stifle the country’s economic growth. There is also growing concern over the legislation giving derivatives priority over your checking and savings accounts. The legislation in the reform affects consumer’s bank deposits.
When you deposit money in your bank it legally becomes an asset of the banking institution. Essentially, you are making an investment in the bank. The Federal Deposit Insurance Corporation (FDIC) insures deposits at applicable banks up to $250,000. The part that many people don’t know is that in a crisis the FDIC can pay out the money “only to the extent that FDIC has the money to distribute.”
By depositing money into the bank you are becoming an investor in the financial institution. This fact makes consumers more aware and willing to review and research their bank before opening new accounts and making deposits. However, the research process has become difficult in the last few years.
About Bank Ratings
The public currently determines financial soundness by using CLES ratings, or Camel Ratings, which classify a bank’s overall condition by considering the following criteria:
- (C) Capital adequacy
- (A) Asset quality
- (M) Management
- (E) Earnings
- (L) Liquidity
- (S) Sensitivity to market risk
All banks receive a score from 1 – 5, with the strongest banks securing a rating of 1. The numbers are shared with federal agencies and other banks but it is against the law to release the ratings to the public.
As you can imagine, this law against disclosure makes it difficult for consumers to make educated decisions about their bank and savings. However, several third-party companies use public information to estimate a possible rating. Among the most popular free resources are:
Using one or both of the resources above, you can search for your bank and learn the ratings given by each institution. Keep in mind that these are just estimates based on the information that is available to the public. They do not reflect the official CLES ratings. Beginning January 1st, 2018 all banks will be required to disclose quarterly their NSFR or Net Stable Funding Ratios. The International Bank of Settlements Basel Committee on Banking Supervision state: “this requirement will improve the transparency of regulatory funding requirements, reinforce the Sound Principles, enhance market discipline, and reduce uncertainty in the markets as the NSFR is implemented.”
The amount of derivatives held by a financial institutions directly affect the safety of depositor’s funds should the financial institution hold more derivatives then total assets. “The Board of Governors of the Federal Reserve published the Regulatory Capital Rules” for banks. As of January 1, 2015 the Frank Dodd law requires banks to report on a quarterly basis their current holdings. These reports are published by the OCC.The Office of the Comptroller of the Currency, Department of the Treasury (OCC) states that: “Derivatives contracts are concentrated in a small number of institutions. The largest four banks hold 92 percent of the total notional amount of derivatives, while the largest 25banks hold nearly 100 percent.”
- The top five banks on their list are: JP Morgan Chase Bank
- Citibank National Assn.
- Goldman Sachs Bank
- Bank of America
- Wells Fargo Bank
In their 2015 First Quarter Executive Summary, the OCC states: “Insured U.S. commercial banks and savings associations reported trading revenue of $7.7 billion in the first quarter, $3.2 billion higher (71.6%) than the fourth quarter, and $1.5 billion higher (23.9%) than the first quarter of 2014. Credit exposure from derivatives increased in the first quarter. Net current credit exposure (NCCE) increased $146.8 billion quarter-over-quarter, or 41.2% to $502.9 billion. Trading risk, as measured by Value-at-Risk (VaR), increased in the first quarter. Average VaR across the top 5 dealer banking companies rose $47 million, or 14.4%, to $373 million.”
Now more than ever it is important to research your bank’s financial stability and carefully monitor your deposits and withdrawals.
- Dodd-Frank Wall Street Reform Act, by Kimberly Amadeo
- Banks’ World under Dodd-Frank Takes Shape With Volcker Rule, by Clea Benson and David Michaels
- How the U.S. Joined the International Bail-In Regime, by Leandra Bernstein
- FDIC Insurance: You Can bank on it, by Joanne Zornow at Bankrate.com
- Dodd-Frank and Community Banks, by aba.com/aba/documents/DFA/DFGuide.pdf
- Are Your Deposits Still Insured, by Richard Barrington
- How the Government Will Steal your Savings under Dodd-Frank, by Robert Romano
- Derivatives: The Unregulated Global Casino for Banks, by demonocracy.info
- Five Banks Account for 96% of the $250 Trillion In Outstanding US Derivative Exposure, by Tyler Durden
- Understanding the Impact of the CFPB’s Remittance Transfer Rules on Banks and Consumers, by The Clearing House
- The Economic and Political Significance of the Dodd-Frank Act, by Burton Folsom, Hillsdale College
- Deutsche Bank Avoids Dodd-Frank Rule, by wsj.com
- Dodd-Frank Financial Regulations, by c-span.org
- Dodd-Frank Regulatory Reform Resource center, by wolterskluwerfs.com
- The Dodd-Frank Rule of Construction, by sec.gov
- Governance Regulations under Dodd-Frank, by shop.americanbar.org
- Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, by Viral V. Acharya & Thomas F. Cooley
- The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, by David A. Skeel & William D. Cohan
- Banking on Basel: The Future of International Financial Regulation, by Daniel K. Tarullo
- Startup Financing, Equity & Tax, by Arushi Bhandari, available on iTunes for a fee