Ben S Bernanke: Implementation of the Dodd-Frank Act
Testimony by Mr Ben S Bernanke, Chairman of the Board of Governors of the Federal
Reserve System, before the Committee on Banking, Housing, and Urban Affairs, US Senate,
Washington DC, 17 February 2011.
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Chairman Johnson, Ranking Member Shelby, and other members of the Committee, thank
you for the opportunity to testify about the Federal Reserve's implementation of the
DoddFrank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). The
Dodd-Frank Act addresses critical gaps and weaknesses in the U.S. regulatory framework,
many of which were revealed by the recent financial crisis. The Federal Reserve is
committed to working with the other U.S financial regulatory agencies to implement the act
effectively and expeditiously. We are also cooperating with our international counterparts to
further strengthen financial regulation, to ensure a level playing field across countries, and to
enhance international supervisory cooperation. And we have revamped the supervisory
function at the Federal Reserve to allow us to better meet the objectives of the act.
The act gives the Federal Reserve important responsibilities both to make rules to implement
the law and to apply the new rules. In particular, the act requires the Federal Reserve to
complete more than 50 rulemakings and sets of formal guidelines, as well as a number of
studies and reports. We have also been assigned formal responsibilities to consult and
collaborate with other agencies on a substantial number of additional rules, provisions, and
studies. So that we meet our obligations on time, we are drawing on expertise and resources
from across the Federal Reserve System in banking supervision, economic research,
financial markets, consumer protection, payments, and legal analysis. In all, more than
300 members of the Federal Reserve staff are working on Dodd-Frank implementation
projects. We have created a senior staff position to coordinate our efforts and have
developed project-reporting and tracking tools to facilitate management and oversight of all
of our implementation responsibilities.
We have made considerable progress in carrying out our assigned responsibilities. We have
been providing significant support to the Financial Stability Oversight Council, of which the
Federal Reserve is a member. We are assisting the council in designing its systemic risk
monitoring and evaluation process and in developing its analytical framework and
procedures for identifying systemically important nonbank firms and financial market utilities.
We also are helping the new Office of Financial Research at the Treasury Department
develop potential data reporting standards to support the council's systemic risk monitoring
and evaluation duties. We contributed significantly to the council's recent studies - one on
the Volcker rule's restrictions on banking entities' proprietary trading and private fund
activities and a second one on the act's financial-sector concentration limit. And we are now
developing for public comment the necessary rules to implement these important restrictions
and limits. Last week, the Board adopted a final rule to ensure that activities prohibited by the
Volcker rule are divested or terminated in the time period required by the act.
We also have been moving forward rapidly in other areas. Last fall, we issued a study on the
potential effect of the act's credit risk retention requirements on securitization markets, as
well as an advance notice of proposed rulemaking on the use of credit ratings in the
regulations of the federal banking agencies. In addition, in December, the Board and the
other federal banking agencies requested comment on a proposed rule that would implement
the capital floors required by the Collins Amendment. In December, we also requested
comment on proposed rules that would establish standards for debit card interchange fees
and implement the act's prohibition on network exclusivity arrangements and routing
restrictions. In January, the Board, together with the Office of the Comptroller of the
Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision (OTS),
provided the Congress a comprehensive report on the agencies' progress and plans relating
to the transfer of the supervisory authority of the OTS for thrifts and thrift holding companies.
In addition, as provided by the act, we and the Federal Reserve Banks each established
offices to consolidate and build on our existing equal opportunity programs to promote
diversity in management, employment, and business activities.
We continue to work closely and cooperatively with other agencies to develop joint rules to
implement the credit risk retention requirements for securitizations, resolution plans (or "living
wills") for large bank holding companies and council-designated nonbank firms, and capital
and margin requirements for swap dealers and major swap participants. We are consulting
with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading
Commission (CFTC) on a variety of rules to enhance the safety and efficiency of the
derivatives markets, including rules that would require most standardized derivatives to be
centrally traded and cleared, require the registration and prudential regulation of swap
dealers and major swap participants, and improve the transparency and reporting of
derivatives transactions. We also are coordinating with the SEC and the CFTC on the
agencies' respective rulemakings on risk-management standards for financial market utilities,
and we are working with market regulators and central banks in other countries to update the
international standards for these types of utilities.
The transfer of the Federal Reserve's consumer protection responsibilities specified in the
act to the new Bureau of Consumer Financial Protection (CFPB) is well under way. A team at
the Board, headed by Governor Duke, is working closely with the staff at the CFPB and at
the Treasury to facilitate the transition. We have provided technical assistance as well as
staff members to the CFPB to assist it in setting up its functions. We have finalized funding
agreements and provided initial funding to the CFPB. Moreover, we have made substantial
progress toward a framework for transferring Federal Reserve staff members to the CFPB
and integrating CFPB employees into the relevant Federal Reserve benefit programs.
One of the Federal Reserve's most important Dodd-Frank implementation projects is to
develop more-stringent prudential standards for all large banking organizations and nonbank
firms designated by the council. Besides capital, liquidity, and resolution plans, these
standards will include Federal Reserve- and firm-conducted stress tests, new counterparty
credit limits, and risk-management requirements. We are working to produce a
wellintegrated set of rules that will significantly strengthen the prudential framework for large,
complex financial firms and the financial system.
Complementing these efforts under Dodd-Frank, the Federal Reserve has been working for
some time with other regulatory agencies and central banks around the world to design and
implement a stronger set of prudential requirements for internationally active banking firms.
These efforts resulted in the adoption in the summer of 2009 of more-stringent regulatory
capital standards for trading activities and securitization exposures. And, of course, it also
includes the agreements reached in the past couple of months on the major elements of the
new Basel III prudential framework for globally active banks. Basel III should make the
financial system more stable and reduce the likelihood of future financial crises by requiring
these banks to hold more and better-quality capital and more-robust liquidity buffers. We are
committed to adopting the Basel III framework in a timely manner. In December 2010, we
requested comment with the other U.S. banking agencies on proposed rules that would
implement the 2009 trading book reforms, and we are already working to incorporate other
aspects of the Basel III framework into U.S. regulations.
To be effective, regulation must be supported by strong supervision. The act expands the
supervisory responsibilities of the Federal Reserve to include thrift holding companies and
nonbank financial firms that the council designates as systemically important, along with
certain payment, clearing, and settlement utilities that are similarly designated. Reflecting the
expansion of our supervisory responsibilities, we are working to ensure that we have the
necessary resources and expertise to oversee a broader range of financial firms and
business models.
The act also requires supervisors to take a macroprudential approach; that is, the Federal
Reserve and other financial regulatory agencies are expected to supervise financial
institutions and critical infrastructures with an eye toward not only the safety and soundness
of each individual firm, but also taking into account risks to overall financial stability.
We believe that a successful macroprudential approach to supervision requires both a
multidisciplinary and wide-ranging perspective. Our experience in 2009 with the Supervisory
Capital Assessment Program (popularly known as the bank stress tests) demonstrated the
feasibility and benefits of employing such a perspective. Building on that experience and
other lessons learned from the recent financial crisis, we have reoriented our supervision of
the largest, most complex banking firms to include greater use of horizontal, or cross-firm,
evaluations of the practices and portfolios of firms, improved quantitative surveillance
mechanisms, and better use of the broad range of skills of the Federal Reserve staff. And we
have created a new Office of Financial Stability within the Federal Reserve, which will
monitor financial developments across a range of markets and firms and coordinate with the
council and with other agencies to strengthen systemic oversight.
The Federal Reserve is committed to its long-standing practice of ensuring that all of its
rulemakings are conducted in a fair, open, and transparent manner. Accordingly, we are
disclosing on our public website summaries of all communications with members of the
public - including banks, trade associations, consumer groups, and academics - regarding
matters subject to a proposed or potential future rulemaking under the act. We also have
implemented measures within the act to enhance the Federal Reserve's transparency. In
December, we publicly released detailed information regarding individual transactions
conducted between December 1, 2007, and July 20, 2010, across a wide range of Federal
Reserve credit and liquidity programs, and we are developing the necessary processes to
disclose information concerning transactions conducted after July 20, 2010, on a delayed
basis as provided in the act.
To conclude, the Dodd-Frank Act is a major step forward for financial regulation in the United
States. The Federal Reserve will work closely with our fellow regulators, the Congress, and
the Administration to ensure that the law is implemented expeditiously and in a manner that
best protects the stability of our financial system and our economy.