Roundup: Two years of US financial reform paves way out of financial crisis

WASHINGTON, Jul 22, 2012 (Xinhua via COMTEX) --by Wang Zongkai, Yang Jian

The U.S. Congress passed alandmark reform, known as the Dodd-Frank Wall Street Reform andConsumer Protection Act, on July 21, 2010, to prevent thefinancial sector from repeating the 2008 crisis.

Two years later, with the support of Dodd-Frank, analtysts sayU.S. financial markets are stronger than they were before thecrisis, and the U.S. public can count on better consumer financeprotection while dealing with financial services institutions.

CONSUMERS HAVE A WATCHDOG

Perhaps the most notable result of the Dodd-Frank Act is theestablishment of the Consumer Financial Protection Bureau (CFPB).

The agency aims to protect consumers from confusing, andsometimes deceptive, financial products and lending practices likethe ones in mortgage scandals, according to the Center forAmerican Progress, a public policy research organization.

Prior to its creation, the authority to write and implementrules for protecting consumers was dispersed between states andseveral different federal agencies. Often, consumer protection wasnot a relatively high priority for regulators charged withmonitoring large banks and major markets.

Especially since the appointment of Richard Cordray as head ofthe bureau early this year, the CFPB finally can assume its fullrule-making and supervisory authority.

On June 18, the new consumer protection agency announced itsfirst public enforcement action with an order requiring CapitalOne Financial Corp. to refund about 140 million U.S. dollars to 2million customers and pay an additional 25-million-dollar penaltyfor pressuring or misleading consumers into paying for "add-onproducts" such as payment protection and credit monitoring whenthey activated their credit cards.

"We are putting companies on notice that these deceptivepractices are against the law and will not be tolerated," Cordraysaid.

SYSTEMICALLY IMPORTANT FIRMS UNDER SEVERE OVERSIGHT

One of the biggest contributing factors to the 2008 financialcrisis was that the activities of many non-bank financialinstitutions, those without a full banking license or notsupervised by a national or international regulatory agency, wentlargely unchecked.

After the collapse of large non-banks such as AmericanInternational Group and Lehman Brothers, Dodd-Frank created theFinancial Stability Oversight Council (FSOC) to identifysystemically important financial institutions (SIFIs).

Under the final rule the FSOC issued in April 2012, non-bankfinancial institutions will be designated "systemically important"if they have total assets of more than 50 billion dollars and meetone of five thresholds relating to credit default swaps,outstanding debt, derivatives, leverage ratio and short-term debt.

In July 2012, the council designated eight financial clearinghouses as systemically important.

SIFIs are subject to centralized regulatory oversight by theFederal Reserve. The Fed sets out and implements rules includingdebt limits, core tier one capital ratio and restrictions fromcertain types of risky activities.

The Fed can also impose additional capital requirements onSIFIs, which proved to be a viable way to deleverage portfolio andenhance capital buffers for financial distress.

When Lehman Brothers failed, it had one dollar in equity forevery 30 dollars it was borrowing.

Dodd-Frank also mandated the Fed to carry out annual stresstests on all banks with 50 billion dollars or more to determine ifthey have the capital needed to absorb losses under crisisscenarios.

The latest test results in March 2012 showed that 15 of the 19largest financial firms operating in the United States had enoughcapital to withstand a severe recession. The 2009 test found 10 ofthe banks had insufficient capital to withstand a crisis.

"Thanks in part to progress on financial reform, the U.S.financial system is stronger and better able to absorb shocks thanwas the case even a year ago," the FSOC said in a report days ago.

TONS OF THREATS LIE AHEAD

It is important to know that the two years of efforts aresimply the first step in a process of shoring up the financialsystem. With tremendous technical and political headwinds, theDodd-Frank Act still has a tough war to fight in the years ahead.

For example, regulators need to finalize many rules withtechnical details to make markets safer, keep companiescompetitive and protect U.S. consumers.

Meanwhile, "police officers" of the financial sector have tohead-butt against opponents who keep seeking to weaken and delaykey measures so as to discard progress made so far.

Groups of Republicans both in the House and the Senate arealways ready to take chance to roll back the prescription made byDodd-Frank. From the moment it was signed into law, Wall Streetlobbyists have fought regulators over every line in therule-making process.

To make it worse, scandals after scandals keep popping up. Notsurprisingly, headlines like JPMorgan Chase's sudden trading lossand Barclays' rigging on Libor and Euribor rates will not becomeextinct for good.

"Threats to financial stability are always present even if theyare not always easy to discern in advance," said the FSOC.

U.S. President Barack Obama has called the Dodd-Frank Act "thestrongest consumer financial protections in history." After all,the 2,300-page act dealt a major blow to the extravagant financialcorruption that caused the global financial crash in 2008.