WASHINGTON — Even if lawmakers sign off as expected on a final regulatory reform bill before the July 4 recess, the battle over the legislation will just be a prologue to the longer and much more complicated fight over how the legislation will be implemented.
If conference negotiations produce a law similar to the Senate version of reform, the industry and regulators face a gargantuan task of enacting roughly 120 required rules, not to mention completing scores of mandated reports.
Observers said the assignment for the financial agencies will be unprecedented in recent decades, eclipsing past government overhauls, such as the implementation of post-Sept. 11 changes and the Sarbanes-Oxley law. The new bill calls for not only extensive agency collaboration, but rules from new bodies that must first be created.
"The conditions will be more complex than we've ever seen, since regulators will be asked to work in new ways, with consultation and joint rulemaking and through new institutions," said Margaret Tahyar, a partner at Davis Polk. "It's the post-SOX regulatory march magnified exponentially."
As banks lobby fiercely on Capitol Hill, groundwork is being laid for an equally intense engagement process with the regulators, who have the direct role of determining how strict policies will be. Industry representatives said they are still focusing on the legislative process but plan to move on to regulators soon after the bill is signed.
"There is going to be quite a bit of action after this legislation is passed," said Christopher Cole, a senior regulatory counsel with the Independent Community Bankers of America. "No formal discussions have begun, and that's just because whenever we've met with regulators we've asked 'what if,' and they've always said that's a big 'if,' and meaning it's a big if … whether the law passes the way they think it will."
Total regulatory moves to implement the law, as proposed in the Senate version, could exceed 200 by some estimates. (The House version includes many of the same requirements, but the Senate version goes further. Many observers expect the final version to resemble the Senate bill more than the House bill.)
Among some of the more pressing details, observers said, would be the Federal Deposit Insurance Corp.'s implementing a new system for calculating premiums, and how the Office of the Comptroller of the Currency — which will absorb the Office of Thrift Supervision — will change supervisory policies for federal thrifts.
There are also much broader reform issues, including how to create a new consumer protection regulator and systemic-risk council, enactment of new capital limits and how to restrict proprietary trading under the so-called Volcker Rule.
Among other required issuances are separate regulations by the FDIC and the Federal Reserve Board concerning their respective emergency assistance facilities; joint rules by the bank regulators and the Securities and Exchange Commission requiring securitizers to retain a portion of the credit risk of transferred assets; rules from the Fed governing the concentration limits of large firms; and a regulation by the new consumer financial protection regulator restricting the interchange fees charged by debit card issuers.
"It's a very, very big, and quick, pile" of rules, said Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc. "The thing to focus on is not just the number of rules, but the speed with which most of this bill is to be implemented. The new resolution process essentially takes effect upon enactment, and there's no experience with it. The whole process is dramatically different, and it comes at a time obviously of ongoing significant systemic fragility."
Tahyar, who has worked on an analysis of the implementation for her firm, estimated 125 required rulemakings under the Senate bill, in addition to 45 reports or studies and 33 rulemakings that agencies are permitted — but not required — to complete. Over a dozen agencies would be involved. Yet she said the breakdown was conservative and "it's impossible to be precise while the bills are still bouncing around."
"Where will busy regulators find the time and where will all the expertise come from?" Tahyar said. "What if the regulatory agenda laid out in the statutes, and filling up all the time, pushes aside the space for other emerging agenda items?"
A similar analysis by Sullivan & Cromwell counts more than 250 required and recommended rulemakings and studies in the Senate bill. (It shows that in many cases a single section of the legislation requires multiple acts by a regulator.)
Wayne Abernathy, the American Bankers Association's executive director of financial institutions policy and regulatory affairs, said his staff's work to prepare for the implementation is preliminary, but will accelerate once the bill is finalized.
"As soon as it is signed, my staff has to be involved with, one, helping banks cope with the changes, and, two, how to provide the best information to the regulators so they're implementing it with as much information and understanding as they possibly can," Abernathy said.
An FDIC spokesman agreed the process will not kick into high gear until final enactment.
"We are reviewing implementation and how to ensure the FDIC can meet any mission that Congress may ask us to perform when the legislation is finalized," said Andrew Gray, the FDIC's chief spokesman.
"Implementation is an outgrowth of our ongoing planning process to ensure maximum capabilities to resolve the largest failing banks."
Even though no formal talks on implementation have begun with Congress yet to reconcile the House and Senate versions, observers said the bill touches on several issues that the industry and regulators have debated domestically and internationally for years.
"Many of the critical rules in the bill are pending in global frameworks, and any of the large institutions have been rightly engaged for awhile particularly on contingent capital, liquidity and 'living wills' issues," Petrou said.
She has been advising clients to talk to the regulatory agencies as much as Congress. "Many of them have … at very senior levels with the U.S. and global regulators," she said.
"In any areas where there was some question about statutory authority, that's obviously been resolved in favor of the regulators. It's not like somebody just woke up and said, 'Let's a have a liquidity rule.' "
But even though banks and regulators have discussed issues raised by the bill ahead of time, the sheer complexity of overhauling the regulatory structure will present new challenges.
Richard Hunt, the president of the Consumer Bankers Association, cited the creation of a new consumer financial protection regulator — which in the Senate bill would be housed under the Fed but many want to make it a separate agency — as an example.
"If it's a new responsibility of an existing agency, that's much easier than the creation of a new agency," Hunt said.
While the eventual consumer protection agency is likely to borrow heavily from existing bank regulators, bankers at the moment have no vehicle to engage officials on how it will be run.
Hunt said the CBA has had "high-level discussions" with various regulators about how the consumer regulator would be staffed, but, he added, "You can't talk to an agency that doesn't exist."
Michael Bleier, a partner at Reed Smith and former assistant general counsel at the Fed, said the "revised regulatory structure … will make" implementing the overhaul "more complex and longer than in the past."
The need for multiple agencies to create joint rules will emphasize the importance of cross-regulator panels, such as the Federal Financial Institutions Examination Council, Bleier said.
"The FFIEC may come to play a greater coordinating role than in the past," he said. "At the same time, Congress will not be very tolerant of delay and will expect the regulatory agencies to fast track many of the likely new rules."
Abernathy said a priority early on in the process is clear rules from the FDIC on how it would use assets, instead of deposits, to calculate insurance premiums. (The provision was added as an amendment to the Senate bill.)
"They'll need to establish rules that make clear what gets counted and what doesn't get counted, and how that information is gathered," he said.
Also near the top of the regulators' list are rules to implement the transition of the OTS into the OCC, and how the combined regulator will oversee thrifts. "There are ways the OTS is run that don't match the way the OCC is run," Abernathy said.
But after regulators finish such nuts-and-bolts changes, there is still the question of implementing newly conceived reforms, such as the Volcker Rule, named for former Fed chief Paul Volcker. (The Senate bill calls for the rule to be implemented jointly between the Fed, FDIC and OCC.)
"Nothing happens under the Volcker Rule until there is some kind of implementing regulation that sets definitions, tolerances and all kinds of other terms and parameters," Abernathy said.