Dodd-Frank Regulations: Impacts on Community Banks, Credit Unions and Systemically Important Institutions
Published: 2015-12-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The 2010 Dodd-Frank Act requires or authorizes various federal agencies to issue rules to implement reforms intended to strengthen the financial services industry. The act, as amended, includes a provision for GAO to annually study these regulations. This report examines (1) the regulatory analyses federal agencies conducted in Dodd-Frank Act rulemakings and interagency coordination in the rulemaking process; (2) the possible impact of selected Dodd-Frank Act provisions and related rules on community banks and credit unions; and (3) the possible impact of selected Dodd-Frank Act provisions and their implementing rules on financial market stability.
GAO reviewed Federal Register releases for 26 Dodd-Frank Act rules that became effective July 23, 2014-July 22, 2015 to determine if agencies conducted the required regulatory analyses and coordination. Separately, GAO examined nine Dodd-Frank Act rules that were effective as of October 2015 for their impact on community banks and credit unions. GAO chose these rules because regulators and others expected them to affect these institutions. GAO analyzed data on community banks and credit unions from 2010 to 2015, reviewed studies, and interviewed staff from federal financial agencies and market participants. Additionally, GAO developed indicators on the impact of systemic risk-related provisions and rules and conducted an economic analysis to assess the act's impact on large bank holding companies.
Regulators provided technical comments, which were incorporated as appropriate.
section_title: What GAO Found
paragraphs: Federal financial agencies conducted required regulatory analyses for rules issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and also reported required coordination. These agencies also addressed key elements of Office of Management and Budget guidance for conducting cost-benefit analyses for rules considered major—rules likely to result in an annual impact on the economy of $100 million or more, among other things.
With regard to select Dodd-Frank Act rules expected to have impacts on community banks and credit unions, community banks, credit unions, and industry associations GAO interviewed cited an increase in compliance burden associated with these rules. This included increases in staff, training, and time allocation for regulatory compliance and updates to compliance systems. Some of these industry officials also reported a decline in specific business activities, such as loans that are not qualified mortgages, due to fear of litigation or not being able to sell those loans to secondary markets. The results of surveys we reviewed suggest that there have been moderate to minimal initial reductions in the availability of credit among those responding to the various surveys and regulatory data to date have not confirmed a negative impact on mortgage lending. However, these results do not necessarily rule out significant effects or the possibility that effects may arise in the future. Federal financial regulators are conducting retrospective analyses of Dodd-Frank Act rules on small entities. GAO developed indicators associated with resources used to comply with regulations and with business lines that may be affected by Dodd-Frank Act regulations to provide baselines against which to monitor future trends. For example, GAO's indicators suggest that residential mortgage loans as a fraction of assets have generally grown for banks of all sizes and for some smaller credit unions but have decreased for larger credit unions. However, changes in GAO's indicators may reflect factors other than the influence of Dodd-Frank Act rules, such as consumer demand for credit.
The full impact of the Dodd-Frank Act remains uncertain because many of its rules have yet to be implemented and insufficient time has passed to evaluate others. Using recently released data, GAO updated indicators from its prior reports that monitor key risk characteristics of large U.S. bank holding companies, and added new indicators that monitor interconnectedness. Although changes in the indicators are not evidence of causal links to the act's provisions, some indicators suggest companies' leverage generally decreased and liquidity generally improved since the act's passage. GAO's updated regression analysis suggests that the act has had little effect on the funding costs of these companies and may be associated with improvements in some measures of their safety and soundness. Indicators associated with the act's swap reforms suggest that holding companies have been requiring their counterparties to post a greater amount of collateral against derivatives contracts. GAO also developed indicators to monitor key risk characteristics of nonbank financial companies designated for supervision by the Board of Governors of the Federal Reserve System. Because few rules for these companies have been finalized or implemented, these indicators provide a baseline against which to monitor future trends.

section_title: Letter
paragraphs: In 2010, Congress passed the Dodd-Frank Wall Street Reform and  Consumer Protection Act (Dodd-Frank Act) in response to the 2007–2009  financial crisis that disrupted the U.S. financial system. Under the Dodd- Frank Act, federal agencies are directed or have the authority to issue  hundreds of regulations to implement the act’s provisions. As agencies  continue to develop and implement the regulations, some industry  associations and others have reported on the potential impact,  individually and cumulatively, on financial markets and nonfinancial  institutions. Although the Dodd-Frank Act exempts small institutions, such  as community banks and certain credit unions, from several of its  provisions, and authorizes regulators to provide small institutions with  relief from certain regulations, it also contains provisions that impose  additional restrictions and compliance costs on these institutions.
Agencies normally must comply with various federal rulemaking  requirements as they draft and implement regulations. For example,  many rulemakings are substantive and are generally subject to the notice  and comment requirements of the Administrative Procedure Act (APA),  and many rulemakings must include some form of regulatory analysis,  which provides a formal way of organizing evidence to help in  understanding the potential effects of new regulations. Certain statutes  and executive orders require varying regulatory analyses, and the extent  to which independent regulatory agencies, such as some of the federal  financial regulators (financial regulators), are subject to the requirements  varies. For example, Executive Order (E.O.) 12,866 requires executive  federal agencies to assess costs and benefits of proposed regulatory  action and any alternatives. This order does not apply to independent  regulatory agencies such as banking, securities, or futures regulators, or  the Bureau of Consumer Financial Protection (commonly known as the  Consumer Financial Protection Bureau, or CFPB). However, the CFPB  has a separate requirement under the Act to consider the potential  benefits and costs to consumers and covered persons as part of a  rulemaking under a federal consumer financial law.
Section 1573(a) of the Department of Defense and Full-Year Continuing  Appropriations Act of 2011 amends the Dodd-Frank Act and includes a  provision for us to annually review financial services regulations, including  those of CFPB. We have previously issued four reports under this  mandate. This report examines the  regulatory analyses conducted by the federal financial regulators and  the Department of the Treasury (Treasury) in their Dodd-Frank Act  rulemakings, including their assessments of which rules they  considered to be major rules, and coordination between and among  federal regulators on these rulemakings; possible impact of promulgated Dodd-Frank Act provisions on  community banks and credit unions and their business activities; and possible impact of selected Dodd-Frank Act provisions and their  implementing regulations on financial market stability.
To examine the regulatory analyses and coordination conducted by the  federal financial regulators and Treasury, we focused our analysis on the  final rules issued pursuant to the Dodd-Frank Act that became effective  from July 23, 2014, through July 22, 2015, a total of 26 rules (see app.
II). We reviewed federal statutes, regulations, and GAO studies on  these rules as well as Federal Register releases that contain information  on the regulatory analyses conducted by agencies and their coordination  efforts. Using GAO’s Federal Rules database, we found that 6 of the 15  rules were classified by the Office of Management and Budget (OMB) as  major rules under the Congressional Review Act (CRA). We developed a  data collection instrument to compare and assess the regulatory analysis  conducted for the major rules against the principles outlined in OMB  Circular A-4, which provides guidance to federal agencies on the  development of regulatory analysis. We also reviewed the Dodd-Frank  Act and Federal Register releases to identify the interagency coordination  or consultation requirements as required by the act for the 26 rules in our  scope.
To assess the possible impact of the Dodd-Frank Act on community  banks and credit unions, we used our September 2012 report, which  identified provisions expected to affect some or all community banks and  credit unions, to identify select final rules that became effective by  October 2015. While we started with a larger population of rules, we  specifically reviewed nine final rules which were identified by the  community banks and credit unions we interviewed as potentially having  an impact for the purpose of this report. We reviewed the Federal  Register releases for these final rules and relevant material on the act  and the final rules, as well as five studies by federal and state regulators,  industry associations, and academics on the potential impact of the final  rules on community banks and credit unions. All but one study we  reviewed relied on surveys of banks, usually contacted through banking  association member lists. The final study consisted of a study of all  payment card networks. We conducted semi-structured interviews with  federal regulators, representatives from the Independent Community  Bankers of America (ICBA), the Credit Union National Association  (CUNA), the National Federation of Independent Business, the U.S.  Chamber of Commerce, and a non-generalizable, purposive sample of  four state credit union and community bank associations and eight  community banks and credit unions about the impact of the final rules on  community banks and credit unions. Between July and September 2015,  we interviewed representatives from two state community banking and  two state credit union associations from Georgia, Illinois, Louisiana, and  Pennsylvania. We also interviewed representatives from four community  banks and four credit unions that fell in each of the four asset categories:  under $250 million, between $250 million and $500 million, between $500  million and $1 billion, and between $1 billion and $10 billion. While the  information we obtained from the interviews provides useful insights, it  cannot be used to make generalizations about the experiences of all  community banks and credit unions since the selection of interviewees  relied on non-probability sampling methods. Nevertheless, we purposely  sought to achieve variety in our sample as a way to gain access to a  range of experiences within the target population.
We also analyzed bank quarterly Reports of Condition and Income (Call  Reports) data for depository institutions and credit unions obtained from  the Federal Financial Institutions Examination Council (FFIEC) and  National Credit Union Administration (NCUA), respectively, from the first  quarter of 2006 through the second quarter of 2015. We used these data  to construct indicators of the cumulative costs associated with complying  with Dodd-Frank Act regulations, including numbers of employees per $1  million in assets, non-interest expenses as a percentage of assets, and  earnings as a percentage of assets. We used the same data to  construct indicators associated with business lines that may be affected  by Dodd-Frank Act regulations, including residential mortgage lending as  a percentage of assets. We assessed the reliability of the FFIEC and  NCUA data by reviewing relevant documentation and electronically  testing the data for missing values, outliers, and invalid values, and we  found the data to be sufficiently reliable for the purpose of constructing  indicators associated with compliance costs and business lines for banks  and credit unions. Although we analyzed the impact of a number of  specific Dodd-Frank Act provisions on community banks and credit  unions, assessing the extent to which these provisions or their related  regulations should apply to such institutions was beyond the scope of our  work.
To analyze the impact of the Dodd-Frank Act on financial market stability,  we updated several indicators developed in our prior reports with data  through the second quarter of 2015. We also created new indicators for  banks that are systemically important financial institutions (bank SIFIs)  and nonbank financial institutions designated by the Financial Stability  Oversight Council (FSOC) for supervision by the Board of Governors of  the Federal Reserve (Federal Reserve), or designated nonbanks. We  updated indicators monitoring changes in size, complexity, leverage, and  liquidity of bank SIFIs and added new indicators of interconnectedness,  which captures direct or indirect linkages between financial institutions  that may transmit distress from one institution to another. We updated our  econometric analysis estimating changes in measures of the (1) funding  cost for bank SIFIs and (2) safety and soundness of bank SIFIs. Since we  began developing and tracking indicators for bank SIFIs, FSOC has  designated four nonbank institutions for enhanced supervision by the  Federal Reserve. As such, we added new indicators associated with the  size, interconnectedness, leverage, and liquidity of these institutions.  Finally, we updated our indicators monitoring the extent to which certain  swap reforms are consistent with the act’s goals of reducing risk. For  those parts of our methodology that involved the analysis of computer- processed data from Bloomberg, the Federal Reserve Bank of Chicago,  the Federal Reserve, the National Information Center, and the Bureau of  Economic Analysis, we assessed the reliability of these data by reviewing  relevant documentation; electronically testing the data for missing values,  outliers, and invalid values; and interviewed Federal Reserve staff about  Federal Reserve’s data. We determined the data were sufficiently reliable  for our purposes—monitoring changes in SIFI characteristics, estimating  changes in the cost of credit bank SIFIs provided and their safety and  soundness, and assessing the amount of margin collateral that over-the- counter derivatives counterparties used.
We conducted this performance audit from April 2015 to December 2015  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Federal Prudential Regulators
paragraphs: In the banking industry, the specific regulatory configuration generally  depends on the type of charter the banking institution chooses.  Depository institution charter types include  commercial banks, which originally focused on the banking needs of  businesses but over time have broadened their services;  thrifts, which include savings associations and savings and loans, and  were originally created to serve the needs—particularly the mortgage  needs—of those not served by commercial banks; and  credit unions, which are member-owned cooperatives run by member- elected boards with an historical emphasis on serving people of  modest means.
All depository institutions that have federal deposit insurance have a  federal prudential regulator that generally may issue regulations and take  enforcement actions against institutions within its jurisdiction. These  regulators also oversee depository institutions for safety and soundness  purposes and compliance with other laws and regulations. Holding  companies that own or control a bank or thrift are subject to Federal  Reserve supervision. The Bank Holding Company Act of 1956 and the  Home Owners’ Loan Act set forth regulatory frameworks for bank holding  companies and thrift holding companies, respectively. The Dodd-Frank  Act made the Federal Reserve the regulator of thrift holding companies  and amended the Home Owners’ Loan Act and the Bank Holding  Company Act to create certain similar requirements for bank and thrift  holding companies. The prudential regulators are identified in table 1.
section_title: Securities and Futures Regulators
paragraphs: The securities and futures markets are regulated under a combination of  self-regulation (subject to oversight by the appropriate federal regulator)  and direct oversight by the Securities and Exchange Commission (SEC)  and Commodity Futures Trading Commission (CFTC), respectively.  SEC regulates the securities markets, including participants such as  securities exchanges, broker-dealers, investment companies, corporate  issuers, and certain investment advisers and municipal advisors. SEC’s  mission is to protect investors; maintain fair, orderly, and efficient  markets; and facilitate capital formation. SEC also oversees self- regulatory organizations—including securities exchanges, clearing  agencies, and the Financial Industry Regulatory Authority. These  organizations have responsibility for overseeing securities markets and  their members; establishing the standards under which their members  conduct business; monitoring business conduct; and bringing disciplinary  actions against members for violating applicable federal statutes, SEC’s  rules, and their own rules.
CFTC is the primary regulator of futures markets, including futures  exchanges and intermediaries, such as futures commission merchants.  CFTC’s mission is to protect market users and the public from fraud,  manipulation, abusive practices, and systemic risk related to derivatives  subject to the Commodity Exchange Act, and to foster open, competitive,  and financially sound futures markets. CFTC oversees the registration of  intermediaries and relies on self-regulatory organizations, including the  futures exchanges and the National Futures Association, to establish and  enforce rules for member behavior. CFTC and SEC jointly regulate  security futures (generally futures on single securities and narrow-based  security indexes). In addition, Title VII of the Dodd-Frank Act expands  regulatory responsibilities for CFTC and SEC by establishing a new  regulatory framework for swaps. The act authorizes CFTC to regulate  swaps and SEC to regulate security-based swaps with the goals of  reducing risk, increasing transparency, and promoting market integrity in  the financial system. CFTC and SEC share authority over mixed swaps— security-based swaps that have a commodity component.
section_title: Consumer Financial Protection Bureau
paragraphs: The Dodd-Frank Act transferred consumer protection oversight and other  authorities regarding certain consumer financial protection laws and  institutions from multiple federal regulators to CFPB, creating a single  federal entity to help, among other things, foster consistent enforcement  of federal consumer financial laws. The Dodd-Frank Act charged CFPB  with the following responsibilities, among others: ensuring that consumers are provided with timely and understandable  information to make responsible decisions about financial  transactions; ensuring that consumers are protected from unfair, deceptive, or  abusive acts and practices, and from discrimination; monitoring compliance with federal consumer financial law and taking  appropriate enforcement action to address violations;  identifying and addressing outdated, unnecessary, or unduly  burdensome regulations; ensuring that federal consumer financial law is enforced consistently,  without regard to the status of a person as a depository institution, in  order to promote fair competition; ensuring that markets for consumer financial products and services  operate transparently and efficiently to facilitate access and  innovation; and  conducting financial education programs.
Furthermore, the Dodd-Frank Act gave CFPB consumer protection  supervisory authority over certain nondepository institutions, including,  among others, certain mortgage market participants, private student loan  lenders, and payday loan lenders.
section_title: Financial Stability Oversight Council
paragraphs: The Dodd-Frank Act also established the FSOC to identify risks to the  financial stability of the United States, promote market discipline, and  respond to emerging threats to the stability of the U.S. financial system.  FSOC consists of 10 voting and 5 nonvoting members and is chaired by  the Secretary of the Treasury. The 10 voting members are the heads of  Treasury, CFPB, CFTC, Federal Deposit Insurance Corporation (FDIC),  the Federal Reserve, the Federal Housing Finance Agency (FHFA),  NCUA, Office of the Comptroller of the Currency (OCC), and SEC, and an  independent member with insurance expertise. The Dodd-Frank Act also  established the Office of Financial Research in Treasury to support FSOC  and its member agencies by improving the quality, transparency, and  accessibility of financial data and information; conducting and sponsoring  research related to financial stability; and promoting best practices in risk  management. The director of the Office of Financial Research is a  nonvoting member of FSOC, along with the director of the Federal  Insurance Office, and designated state insurance, securities, and banking  regulators.
section_title: Dodd-Frank Act Regulations
paragraphs: The Dodd-Frank Act authorizes certain agencies to adopt regulations to  implement the act’s provisions and, in some cases, gives the agencies  little or no discretion in deciding how to implement the provisions.  However, other rulemaking provisions in the act are discretionary in  nature, stating that (1) certain agencies may issue rules to implement  particular provisions or that the agencies may issue regulations that they  decide are “necessary and appropriate,” or (2) agencies must issue  regulations to implement particular provisions but have some level of  discretion as to the substance of the regulations. As a result, the agencies  may decide to promulgate rules for all, some, or none of the provisions,  and often have broad discretion to decide what these rules will contain.  Many of the provisions in the Dodd-Frank Act target the largest and most  complex financial institutions, and regulators have noted that much of the  act is not meant to apply to community banks. As such, the act exempts  certain small institutions with $10 billion or less in total assets from a  number of its provisions and in other provisions authorizes regulators to  provide smaller institutions with relief in a number of areas. However, the  act is comprehensive and far-reaching and includes some provisions that  impose additional requirements on small insured depository institutions.  In our September 2012 report, we identified Dodd-Frank Act provisions  expected by federal regulators, state regulatory associations, and industry  associations to impact community banks and credit unions. Almost 6,200  (about 98 percent) FDIC-insured banks and thrifts had less than $10  billion in assets in 2015. Of those, almost 61 percent had less than $250  million in total assets. The vast majority of credit unions had less than $10  billion in total assets in 2015. Furthermore, around 75 percent of the  credit unions had less than $100 million in total assets.
section_title: Requirements for Regulatory Analyses in Rulemaking and Retrospective Review
paragraphs: Several regulatory analysis requirements may apply to independent  regulators, including the financial regulators. The regulators are subject to  compliance with various requirements as part of their rulemakings, such  as those in the Paperwork Reduction Act of 1995 (PRA), the Regulatory  Flexibility Act (RFA), as amended by the Small Business Regulatory  Enforcement Fairness Act of 1996, and the CRA.
PRA requires agencies to minimize the paperwork burden of their  rulemakings and evaluate whether a proposed collection is necessary  for the proper performance of the functions of the agency. Under  PRA, agencies include this analysis in the notice of proposed  rulemaking and obtain approval for an information collection from the  OMB.
RFA requires that federal agencies consider the impact on small  entities of certain regulations they issue and, in some cases,  alternatives to lessen regulatory burden on small entities. Although  RFA, through reference to the Small Business Act, generally defines  the term “small entity,” the statute also sets forth a procedure that  permits agencies to formulate their own definitions. For example,  NCUA defines small entities to include federally insured credit unions  with less than $100 million in assets as opposed to other agencies’  reliance on the Small Business Administration’s definition of a small  depository institution (a commercial bank, thrift, or credit union with  $550 million or less in total assets) to define a small depository  institution that falls under that RFA asset threshold.  In some cases, PRA and RFA also require agencies to assess various  impacts and costs, respectively, of their rules. However, RFA, like  PRA, does not require the agencies to conduct formal benefit and cost  analyses.
The Small Business Regulatory Enforcement Fairness Act of 1996,  which amended RFA, generally includes judicial review of compliance  with certain provisions of RFA and requires agencies to develop one  or more small entity compliance guides for each rule or group of  related rules for which the agency must prepare a final regulatory  flexibility analysis. In addition, when an initial regulatory flexibility  analysis is required in connection with a proposed rule, covered  agencies like CFPB must convene a review panel and obtain advice  and recommendations from representatives of small entities on the  effects of the proposed rule on small entities. The initial regulatory  flexibility analyses must describe the number of small entities to which  the proposed rule would apply, projected reporting and recordkeeping  requirements of the proposed rule, any significant alternatives to the  proposed rule which accomplish the stated objectives of applicable  statutes and which minimize any significant economic impact of the  proposed rule on small entities, and any projected increase in the cost  of credit for small entities.
Under CRA, before rules can take effect, agencies must submit their  rules to Congress and the Comptroller General, and rules deemed  major by OMB generally may not become effective until 60 days after  the rules are submitted.
In addition to these requirements, authorizing or other statutes require  certain financial regulators to consider specific benefits, costs, and  impacts of their rulemakings (see table 2). However, like PRA and RFA,  none of these authorizing statutes prescribe a benefit and cost analysis  that includes the identification and assessment of alternatives.
In contrast, E.O. 12,866, supplemented by E.O. 13,563, requires  executive agencies (which do not include independent regulators such as  financial regulators), to the extent permitted by law and where applicable,  to provide more formal cost-benefit analyses that (1) assess costs and  benefits of available regulatory alternatives and (2) include both  quantifiable and qualitative measures of benefits and costs in their  analysis, recognizing that some costs and benefits are difficult to quantify.  Such analysis, according to OMB, can enable an agency to learn if the  benefits of a rule are likely to justify the costs and discover which possible  alternatives would yield the greatest net benefit or be most cost-effective.
In 2003, OMB issued Circular A-4 to provide guidance to executive  agencies on developing regulatory analysis as required by E.O.12,866.  The circular defines good regulatory analysis as including a statement of  the need for the proposed regulation, an assessment of alternatives, and  an evaluation of the costs and benefits of the proposed regulation and the  alternatives. It also standardizes the way costs and benefits of regulatory  actions should be measured and reported. FSOC and Treasury are  subject to E.O. 12,866 and Circular A-4. However, as we have reported,  some independent agencies consult Circular A-4 and some have revised  their internal rulemaking guidance to more fully incorporate OMB’s  regulatory analysis guidance as we had recommended in our 2011 report  on Dodd-Frank Act regulation.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996  (EGRPRA) requires OCC, FDIC, and the Federal Reserve, along with the  FFIEC, to review their regulations at least every 10 years to identify  outdated, unnecessary, or unduly burdensome regulations and consider  how to reduce regulatory burden on insured depository institutions. The  report from the first EGRPRA review was submitted to Congress in 2007  and the second review is underway. The agencies anticipate completing  the current EGRPRA review by the end of 2016. NCUA conducts a  voluntary review of its regulations on the same cycle and in a manner  consistent with the EGRPRA review. Additionally, per NCUA’s internal  policies, NCUA conducts a review of all of its regulations every 3 years  and produces a non-binding memo for its board with suggestions on rules  that should be revised or streamlined. In a process separate from  EGRPRA, CFPB must conduct an assessment of its significant  regulations and publish a report of its review 5 years after the regulations  take effect.
section_title: Agencies Conducted Required Regulatory Analysis and Reported Coordinating as Required on Dodd- Frank Act Rulemakings
paragraphs: In the Federal Register releases of the 26 Dodd-Frank Act rules that we  identified and reviewed, the issuing federal agencies conducted the  regulatory analyses required by RFA and PRA. The agencies also  addressed key elements in OMB’s Circular A-4 for six of the rules that  were identified to be major, that is, they resulted or are likely to result in  an annual impact on the economy of $100 million or more, a major  increase in costs or prices, or significant adverse effects on competition,  employment, investment, productivity, innovation, or on the ability of U.S.- based enterprises to compete with foreign-based enterprises in domestic  or export markets. Additionally, federal agencies reported coordinating on  11 of the 26 rules and were not required to coordinate for the remaining  15 rules.
subsections: section_title: Agencies Conducted Required Regulatory Analyses
paragraphs: Of the 26 Dodd-Frank Act rules in our scope, 15 were substantive— generally subject to public notice and comment under APA—and also  required some form of regulatory analysis. These rules were issued  individually or jointly by CFPB, CFTC, FDIC, the Federal Reserve, FHFA,  Department of Housing and Urban Development (HUD), NCUA, OCC,  SEC or Treasury. (See app. II for a list of the regulations in our review).
In examining the regulatory analyses the agencies reported they  conducted for the 15 substantive rules, we found the following:
Agencies conducted the required regulatory analyses. All the  agencies we reviewed conducted the regulatory analyses pursuant to  RFA for their Dodd-Frank Act rules, when required or applicable. For  example, in the final regulatory flexibility analysis for its rule on  Nationally Recognized Statistical Rating Organizations, SEC identified  significant issues raised by public comments and included responses;  it further determined that small entities may be affected by the rule  and identified actions it took to minimize the effect on small entities.  The Federal Reserve conducted the flexibility analysis for two of the  final rules it issued, although the agency determined that the rules  would not have a significant economic impact on a substantial number  of small entities. All of the agencies also conducted the analyses  required under PRA when required or applicable.
Agencies issued 6 major rules and addressed key elements in OMB’s  Circular A-4 for these rules. Of the 15 substantive rules, OMB  identified 6 as major rules under CRA. Specifically, SEC issued 5  major rules, and the Federal Reserve, FDIC, FHFA, HUD, OCC, and  SEC jointly issued one major rule. Based on our review of all 6  rulemakings, the regulators identified the problems to be addressed  by the rule, the potential benefits and costs, the baseline against  which they assessed benefits and costs, and the regulatory alternative  approaches they considered. They asked for and received public  comments on alternatives for all 6 rulemakings. In 4 rulemakings, the  regulators quantified the costs; in the 2 cases in which they did not  quantify costs, regulators provided reasons why they did not quantify  them. Regulators did not quantify benefits for all 6 major rules  because the benefits were qualitative or the economic benefits were  difficult to quantify.
section_title: Agencies Reported Coordinating as Required on Dodd-Frank Act Rulemakings
paragraphs: The rulemaking agencies coordinated as required by the Dodd-Frank Act  for 11 of the 26 regulations we reviewed (see app. III). For the remaining  15 of the 26 rules, the agencies were not required by the Dodd-Frank Act  to coordinate. We reviewed the rulemakings to document evidence of  required coordination among the agencies and found the following:
On three of SEC’s rulemakings related to swaps, the agency reported  that it coordinated with CFTC and the prudential regulators pursuant  to Title VII of the Dodd-Frank Act. SEC also reported coordinating with  foreign regulators on these rules through bilateral and multilateral  discussions.
On five of CFPB’s rulemakings, the agency reported that it consulted,  or offered to consult with, the prudential regulators and other agencies  pursuant to section 1022 of the Dodd-Frank Act. CFPB staff we spoke  with stated that CFPB met with agencies to coordinate on the rules.
Several agencies jointly issued two of the rulemakings as required by  the act. OCC, Federal Reserve, FDIC, FHFA, SEC, and HUD jointly  issued a rule on credit risk retention. Additionally, CFPB, OCC, and  the Federal Reserve jointly issued a rule on appraisals for higher- priced mortgage loans.
The Federal Reserve reported that it consulted with CFTC, FSOC,  and SEC for its rule on financial market utilities as required by the  act.
Most of the agencies stated that they did not encounter any significant  challenges in coordination and that they have continued to consult and  coordinate with each other.
section_title: Community Banks and Credit Unions Cited a Cumulative Compliance Burden Associated with Dodd-Frank Act Rules
paragraphs: Representatives of community banks and credit unions and industry  associations with whom we spoke noted an increased compliance burden  associated with implementation of Dodd-Frank Act rules. The Dodd-Frank  Act includes numerous reforms to strengthen oversight of financial  services firms and consolidate certain consumer protection  responsibilities within CFPB. In our September 2012 report, we concluded  that some provisions, such as the deposit insurance reforms and CFPB  supervision of nonbank providers of financial services products, have  benefitted or may benefit community banks and credit unions. However,  we noted that other provisions—such as some of the act’s mortgage  reforms—could negatively affect them depending in part on how  regulators implement such provisions and exercise their exemption  authority. Some credit union, community bank, and industry association  representatives said several of the mortgage-related rules have increased  their overall compliance burden, such as increases in staff and training.  Additionally, some said these rules had begun to adversely affect some  lending activities, such as mortgage lending to customers not typically  served by larger financial institutions, even though CFPB provided  exemptions or other provisions to reduce such impacts. The results of  surveys conducted by regulators, industry associations, and academics  on the impact of the Dodd-Frank Act on small banks suggest that there  have been moderate to minimal initial reductions in the availability of  credit among those responding to the various surveys, and regulatory  data to date have not confirmed a negative impact on mortgage lending.  Some community bank, credit union, and industry association  representatives also identified the impact of nonmortgage-related  requirements on business activities.
Regulators told us that it may be too early to assess the full impact of the  Dodd-Frank Act rulemakings and while they have heard concerns about  an increase in compliance burden, they have not been able to quantify  compliance costs. Regulators also said that they are aware of industry  concerns about the potential for unintended impacts from Dodd-Frank Act  rulemaking and implementation. Regulators are currently engaged in  retrospective reviews of rules. In addition, we developed indicators which,  when monitored over time, may be suggestive of impact of the regulations  on community banks and credit unions.
subsections: section_title: Industry Officials Reported Mortgage-Related Rules Generally Increased Compliance Burden
paragraphs: CFPB’s implementation of mortgage-related rules imposes additional  requirements on community banks and credit unions. In September 2012,  we reported that mortgage reform provisions are expected to impose  additional burdens on a large percentage of community banks and credit  unions. In particular, some regulators and industry representatives  expected the reforms to lead smaller institutions to decrease certain  lending activities, or, at the extreme, exit the mortgage business.  However, we also concluded that the full burden on the entities would  depend on the extent to which CFPB (and other agencies) exercised its  authority, where available, to exempt small institutions from any  regulations and how it implemented provisions to provide more limited  relief to small institutions, particularly those in rural or underserved  communities.
Since our 2012 report, CFPB issued mortgage-related rules pursuant to  Titles X and XIV of the Dodd-Frank Act that became effective by October  2015. Many of these rules amended Regulation X, which implements the  Real Estate Settlement Procedures Act (RESPA) of 1974 and Regulation  Z, which implements the Truth in Lending Act (TILA). Representatives  from credit unions, community banks, and industry associations we  interviewed said several of these new rules have increased their overall  compliance burden—training staff, allocating time for regulatory  compliance matters, and updating compliance systems—and in some  cases, have begun to affect mortgage lending. These rules include new  disclosure requirements, minimum standards for mortgage loans, and  new requirements related to escrow accounts and appraisals for higher- priced mortgage loans and mortgage servicing (see table 3).
CFPB’s integrated mortgage disclosure rule implementing requirements  in the Dodd-Frank Act, known as TILA-RESPA Integrated Disclosures  (TRID), combines certain disclosures that consumers receive in  connection with applying for and closing on a mortgage loan. The  purpose of the integrated disclosure is to facilitate compliance with the  disclosure requirements of TILA and RESPA and to help the consumer  understand the transaction by using plain language for the disclosures.
Representatives from community banks, credit unions, and industry  associations we interviewed and CFPB stated that the compliance costs  incurred by community banks and credit unions to implement the new  disclosures included costs to revise and test software and compliance  systems and costs to train employees. Representatives from two  community banks and four credit unions we interviewed stated that they  had to work with third-party vendors to update their loan origination and  documentation system software. CFPB stated in its analysis of the final  rule that the one-time cost of updating software largely would fall on  software vendors because a majority of creditors rely on these vendors.  The CFPB analysis also stated that many vendor contracts are structured  in a way that vendors would not be able to pass through any cost  increase due to a regulation-related software update such as this one.  However, representatives from one community bank and one credit union  indicated that they had to retain a new vendor to comply with the rules.  Representatives from one community bank and one credit union also  stated that they have to conduct additional due diligence on their vendors  to ensure compliance because they are ultimately held liable if the  vendors’ systems or disclosures are not compliant with the rule. As part of  quality assurance, they have to test the vendors’ new systems prior to  implementation. Representatives from ICBA and CUNA stated that some  entities would not have adequate time to test the software for compliance  before the effective date of the rule due to delays by third-party service  providers. CFPB and the other FFIEC member agencies stated in their  letters to industry associations that during initial examination for  compliance with TRID, the agencies’ examiners will expect the  supervised entities to make good faith efforts to comply with the rule’s  requirements in a timely manner. The agencies stated that during early  examinations, examiners will consider an institution’s implementation  plan, including actions taken to update policies, procedures, and  processes; its training of appropriate staff; and its handling of early  technical problems or other implementation challenges. In October 2015,  FDIC and the Federal Reserve issued a Financial Institution Letter and  guidance, respectively, on their approach to early supervision. CFPB  also issued a press release on the regulators’ approach.
Representatives from several community banks and credit unions also  said that they had to train their staff on TRID, including familiarizing them  with the new forms. A representative from one community bank  association stated that compared with larger institutions, community bank  staff have to take on more compliance duties and the community banks  may decide to stop offering certain products in order to minimize  compliance risk. A representative from a community bank state  association stated that community banks may exit the market due to the  costs and time allocated to comply. Furthermore, representatives from  one community bank and one credit union state association indicated that  the new TRID requirements could lengthen the closing process and result  in potential closing delays related to meeting these requirements. CFPB  also recognized this potential impact in its final rulemaking analysis.
subsections: section_title: Ability to Repay and Qualified Mortgage Standards
paragraphs: Representatives from credit unions, community banks, and industry  associations we spoke with said that CFPB’s Ability to Repay and  Qualified Mortgage Standards (ATR/QM) rule could affect mortgage  lending activities of credit unions and community banks, particularly  lending to customers who otherwise might not be served by larger  lenders. However, agency data thus far have not reflected such  changes. The Dodd-Frank Act amended TILA to generally prohibit  lenders from making mortgage loans unless the lender makes a  reasonable and good faith determination based on verified and  documented information that the consumer has a reasonable ability to  repay the loan. In its final rule, CFPB identified eight underwriting factors  a creditor must consider in relation to making the required good faith  determination of a borrowers’ ability to repay, such as current  employment status and monthly debt-to-income ratio. A creditor  presumably satisfies the ability-to-repay requirement by making a  qualified mortgage, which meets certain underwriting requirements and  restrictions on product features and points and fees. CFPB sets out three  main categories of qualified mortgages that are presumed to comply with  the ability-to-repay requirements: general, temporary, and small creditor  (see table 3). Creditors that make qualified mortgages receive some  protection from liability—a safe harbor, or in cases of higher-priced loans,  a rebuttable presumption that ability-to-repay requirements have been  met.
CFPB included special provisions in the final rule for small creditors,  which during our review were defined as those creditors with less than $2  billion in assets (adjusted annually for inflation) that, together with their  affiliates, originated no more than 500 first-lien mortgage loans in the  preceding year. For loans that are not sold and kept in their portfolios,  such creditors must meet some restrictions on qualified mortgages loans,  such as points and fees, but are not subject to a specific debt-to-income  ratio and are permitted a higher interest rate threshold for a safe harbor.  Certain small creditors operating in rural or underserved areas can also  originate mortgages with balloon payments, a risky loan feature otherwise  not permitted for a qualified mortgage.
Representatives from some community banks and credit unions as well  as industry associations we interviewed stated that the ATR/QM rule has  negatively affected mortgage lending, particularly for mortgages that do  not meet the criteria for qualified mortgages. For example,  representatives from some community bank and credit union associations  and one credit union said they were unwilling to make loans that are not  qualified mortgages because they may not benefit from the liability  protection afforded qualified mortgages and borrowers may hold lenders  liable for making mortgage loans that they cannot repay. Representatives  from two community banks said that many banks have been unwilling to  originate loans that cannot be sold on the secondary market.  Representatives from one community bank and one credit union we  spoke with said that investors will not purchase loans that are not  qualified mortgages, such as those that do not meet the debt-to-income  requirement. A 2015 survey of community banks conducted by the  Conference of State Bank Supervisors and state regulators found that  about a third of the 974 state-chartered commercial banks that responded  said that they will only make loans that are not qualified mortgages on an  “exception” basis; additionally, about a third of the respondents did not  intend to make any loans that are not qualified mortgages.
Representatives from several industry associations and community banks  told us that those most likely to be affected by community banks  originating only qualified mortgages are borrowers on the margins of  meeting qualified mortgage standards, or those that would not meet the  underwriting standards at large banking institutions because they were  self-employed, did not have steady income, or were buying in an area  with a lack of comparable sales of similar properties. Representatives  from CUNA and one state community bank association told us that  CFPB’s current rural or underserved area exemption is too narrow and as  a result has limited the ability to lend to those potential borrowers.
Additionally, while survey results cannot be generalized to all banks, an  ICBA survey found that about two thirds of the 519 responding community  banks in the $500 million to $2 billion asset range made too many loans  to qualify as small creditors under CFPB’s current rural and underserved  area exemption. Moreover, about half of the banks responding to this  survey that serve rural areas did not qualify for the rural exception. In  response to concerns expressed by the industry, CFPB amended the  regulatory criteria for small creditor in September 2015 to raise the limit  for small creditors and their affiliates from 500 first-lien mortgages in the  preceding year to 2,000, excluding loans that are held in portfolio, and  expanded the definitions of rural and underserved areas. The rule will  be effective on January 1, 2016. According to CFPB, the revised small  creditor criteria will effectively expand the overall number of creditors that  are eligible to extend small creditor portfolio-qualified mortgages.  Additionally, CFPB estimated that the number of rural small creditors will  increase from about 2,400 to about 4,100. The final rule retains the asset  limit used to determine small creditor status, but was updated to generally  include the assets of certain affiliates.
In our June 2015 report on mortgage reforms, we found that studies that  were conducted or posted after the implementation of the ATR/QM rule  anticipated or suggested moderate to minimal initial reductions in the  availability of credit and willingness to originate loans that are not  qualified mortgages. However, we also found that the ATR/QM rule  would have limited initial impacts on mortgage lending activities because  most loans originated in recent years largely conformed with qualified  mortgage criteria and because not all loans that qualify as qualified  mortgages are subject to the same restrictions. According to a  November 2015 Federal Reserve report examining 2014 data collected  under the Home Mortgage Disclosure Act, there is little indication that the  ATR/QM rules significantly curtailed mortgage credit availability in 2014  relative to 2013. For example, despite the ATR/QM rule that caps  borrowers’ debt-to-income ratio for many loans, the fraction of high debt- to-income loans does not appear to have declined in 2014 from 2013.  However, the report also stated that the results here do not necessarily  rule out the possibility that effects may arise in the future. Additionally,  FDIC stated that FDIC’s data do not appear to confirm a large negative  effect of the rule on small banks. In early 2014, FDIC introduced a new  Community Bank Performance section to the FDIC Quarterly Banking  Profile that is intended to monitor the health of community banks. In the  aggregate, these profiles showed that community banks’ one-to-four  family residential mortgage loan balances have grown in 2014 and  2015.
section_title: Rules Related to Higher-Priced Mortgage Loans and Mortgage Servicing
paragraphs: Representatives from some community banks, credit unions, and industry  associations with whom we spoke noted increased compliance costs  associated with CFPB’s new rules related to escrow accounts, appraisals  for higher-priced loans, and mortgage servicing.
Escrow Requirements. To enhance consumer protection, the Dodd- Frank Act amended TILA to expand escrow requirements for first-lien  higher-priced mortgage loans, including by generally establishing a 5- year minimum for escrow accounts. CFPB’s rule on escrow for  higher-priced mortgage loans increases the time for which mandatory  escrow accounts established for such loans must be maintained from  1 to 5 years, but provides an exemption for certain small creditors  operating in rural or underserved areas and meeting other criteria.  Representatives from ICBA and CUNA said that some of their  community banks and credit union members had to increase  resources to set up and monitor these escrow accounts.  Representatives from both national associations stated that setting up  and monitoring escrow accounts is burdensome and that some  community banks and credit unions do not have adequate technology  or staff to support it. CUNA representatives further stated that some  credit unions had to outsource these functions. ICBA has advocated  for community bank loans held in portfolio to be exempted from the  escrow requirement for higher-priced mortgages because they do not  hold a huge volume of such mortgages. CUNA representatives stated  credit unions that provide low volumes of higher-priced mortgage  loans may cease to provide those loans altogether. While the survey  results cannot be generalized to all banks, in a 2015 survey  conducted by the American Bankers Association, the 182 responding  banks in the survey indicated that cost and, a lack of escrow  capabilities, or, inadequate staff were the primary reasons that they  did not offer escrow services. As discussed earlier, the CFPB  expanded the exemption for small creditors operating in rural or  underserved areas.
Appraisal Requirements For Higher-Priced Mortgage Loans. CFPB’s  joint rule with other federal financial regulators implementing the  Dodd-Frank Act appraisal requirements for higher-priced mortgages  generally requires lenders to obtain one, or in some limited cases  where timing and pricing requirements are triggered, two written  appraisals. In addition, the requirement to obtain two appraisals does  not apply to a number of transactions, including where the property is  in a rural county. One credit union representative said that having to  deliver appraisals 3 business days prior to consummation delayed an  intended closing (due to its remote location, which makes appraisals  complex and turnaround times longer). Representatives from a state  community bank association and one community bank we interviewed  said the requirement for two appraisals (when timing and pricing  requirements are triggered) is a challenge because they have had  difficulty finding two independent appraisers who understand the  market in their respective areas. ICBA representatives stated that for  higher-priced mortgage loans of smaller amounts, the cost of  appraisal becomes significant in proportion to the loan.  Representatives from CUNA and two state credit union associations  stated the rule had a minimal impact on their members because they  generally did not make higher-priced loans.
Mortgage Servicing Rules. CFPB issued two mortgage servicing rules  under TILA and RESPA, designed in part to provide, among other  things, better disclosure to consumers about their loan obligations and  loss mitigation options that may be available if they have difficulty with  their loan obligations. CFPB, in its final rule analysis, noted that the  small servicer thresholds were appropriate in part because it  estimated that more than 98 percent of the insured depository  institutions and credit unions, with less than $2 billion in assets fall  beneath the 5,000 loan threshold, qualifying for the small servicer  exemption from many of the rules. Representatives from ICBA and  one state credit union association told us that the exemptions  available to small servicers are too narrow. Although the rules exempt  small servicers from certain provisions, they require all servicers to  respond to written notices of errors received from borrowers, and all  servicers generally must not make the first notice or filing for  foreclosure unless the borrower is more than 120 days delinquent,  among other provisions. Representatives from several industry  associations we interviewed said that community banks and credit  unions had to expand resources to meet these requirements. ICBA  representatives said the small servicer threshold should be increased  from 5,000 to 20,000 loans. However, representatives from four  community banks we interviewed stated the rules had no impact on  their mortgage servicing or that they did not provide mortgage  servicing. A 2013 survey by the Mercatus Center indicated that less  than two-fifths of the approximately 200 small banks participating in  their survey currently offered mortgage servicing and less than a tenth  discontinued or anticipated discontinuing mortgage servicing as a  result of the Dodd-Frank Act. While survey results and interview  responses cannot be generalized to all small banks, they suggest that  the regulatory requirements would have a small overall impact on  mortgage servicing practices at these banks.
section_title: Industry Officials Also Said Certain Nonmortgage- Related Rules Had Increased Compliance Burden or Changed Business Practices
paragraphs: Representatives from community banks, credit unions, and industry  associations we interviewed also identified the impact of several  nonmortgage-related requirements and implementing rules on  compliance and related business activities. These included requirements  related to credit rating removal, remittance transfers, and debit  interchange and routing (see table 4).
The Dodd-Frank Act required each federal agency to review regulations  that require the use of an assessment of creditworthiness of a security or  money market instrument and any references to, or requirements in,  those regulations regarding credit ratings. The act also required the  agencies to modify the regulations identified during the review by  substituting any references to, or requirements of, reliance on credit  ratings with standards of creditworthiness each agency determines to be  appropriate. Under the agencies’ revised regulations, to determine  whether a security is “investment grade,” insured depository institutions  must determine that the probability of default by the issuer is low and the  full and timely repayment of principal and interest is expected. To  comply with the new standard, banks and credit unions may not rely  exclusively on external credit ratings, but may continue to use such  ratings as part of their determinations. They must supplement any  consideration of external ratings with due diligence processes and  additional analyses that are appropriate for the institution’s risk profile and  the size and complexity of the investment instrument.
Representatives from two industry associations, three community banks,  and one credit union said that the rules increased compliance burden.  Representatives from the community banks and credit union said that  investing became more complex and they have had to devote more time  and resources to research the investment vehicles. Two community bank  association representatives we interviewed stated that community banks  do not have the internal expertise to evaluate their investments. One  community bank association’s representative also stated that the rule  required community banks to hire experts and spend additional time to  document the due diligence they have conducted. While the results  cannot be generalized to all banks, in the Mercatus Center survey, almost  half of the approximately 200 community banks responding to the survey  said that they altered their credit analysis practices in response to this  provision or related guidance, while the other half said they did not.  Among those that altered practices, some said they contracted with  outside firms or hired additional employees to conduct credit analysis or  altered the type of securities they purchased.
subsections: section_title: Remittance Transfers
paragraphs: The Dodd-Frank Act imposes new requirements on remittance transfer  providers. CFPB’s rule on remittance transfers amended Regulation E,  which implements the Electronic Fund Transfer Act. It requires companies  to provide disclosures to consumers before they pay for the remittance  transfers, including about items such as the applicable exchange rate, if  any, and certain fees and taxes. In our September 2012 report,  representatives from some community banks, credit unions, and  associations we interviewed expected the remittance transfer rule to  decrease their (or their member institutions) remittance transfer  business.
Representatives from four industry associations, as well as two credit  unions and one community bank whom we interviewed stated the rule  has had a negative impact. ICBA representatives said that some  community banks tried to keep the number of remittance transfers each  year to below 100 (to avoid having the rules apply to them).  Representatives from CUNA and two state credit union associations said  that some credit unions have increased fees or left the market. For  example, one credit union representative said that it did not have access  to the information and services required by the rule and had to contract  with a correspondent bank to continue to offer the service. As a result, it  increased its remittance fees. One state credit union association  representative said that their members stopped the service to avoid the  related compliance costs. Although the Mercatus Center conducted its  survey of approximately 200 banks prior to the effective date of the rule, it  indicated that a small percentage of the respondents had discontinued or  anticipated discontinuing offering remittances as a result of the rule.  CFPB stated that in response to these concerns, it delayed and amended  this rule twice to ease compliance concerns related to the disclosure of  foreign fees and taxes.  In addition, CFPB officials stated that, based on  their analysis of NCUA call report data, about 90 percent of the credit  unions do not send over 100 transfers annually and thus are exempt from  the remittance rule. CFPB officials additionally stated that the call data  indicates virtually no change in the remittance market by credit unions  since the rule has been implemented.
section_title: Debit Interchange Fee Rule
paragraphs: The Dodd-Frank Act requires the Federal Reserve to prescribe  regulations for any interchange transaction fee that an issuer may receive  or charge for an electronic debit transaction. In implementing the debit  interchange fee rule, the Federal Reserve set a cap on the maximum  permissible interchange fee that any issuer may receive for such a  transaction. Although issuers, together with their affiliates, that have less  than $10 billion in assets are exempt from the cap on interchange fees, all  issuers and networks are prohibited from restricting the number of  networks over which the debit transaction may be processed to less than  two unaffiliated networks. Our September 2012 report on community  banks found that the rule had had a limited impact on exempt issuers, but  industry officials expressed concerns about the potential for their  interchange fees or fee income to decline over the long term.
Representatives from five industry associations, one community bank,  and one credit union stated that the rule has led to a decline in  interchange revenue, although one credit union said that the decline was  minimal. Representatives from one credit union stated that it was hard to  measure the impact of the rule because their revenue had increased due  to the increase in volume of debit card transactions. Data collected by the  Federal Reserve from card networks on the interchange fees showed that  exempt issuers have not experienced a significant impact on the amount  of average interchange fees. In 2011, these data showed that the  average interchange fee received by exempt issuers declined from $0.45  over the first three quarters of 2011 to $0.43 in the fourth quarter of 2011,  when the rule took effect. Federal Reserve data from 2014 showed that  the average interchange fee remained at $0.43 for exempt issuers.
section_title: Regulators Face Challenges Determining the Cumulative Impact of Dodd-Frank Act Rules on Community Banks and Credit Unions
paragraphs: Regulators told us that it is still too early to assess the full impact of Dodd- Frank Act rulemakings on community banks and credit unions, and while  they have heard concerns about the increase in compliance burden, they  have not been able to quantify compliance costs. Two regulators told us  that it was too early to determine the impact of the Dodd-Frank Act  rulemakings; NCUA officials stated that there has been little cumulative  impact from the rules to date because many have only recently become  effective. OCC and FDIC officials also said that it would be difficult to  disentangle the impact of Dodd-Frank Act regulations from changes in  response to the overall economic environment or other rulemakings.
FDIC, OCC, and Federal Reserve officials stated that the institutions with  which they have spoken are concerned about integrating many rules into  their business operations and with the increase in compliance costs. For  instance, OCC officials stated that even if community banks do not hire  new staff, the existing staff would have to be redeployed into compliance  areas. FDIC officials stated that the cumulative compliance cost is hard to  quantify because these costs are not reported separately in Call Reports.  Regulators also said that compliance activities do not appear to have  reduced profitability for community banks. For example, Federal Reserve  officials said that profitability for community banks has increased.  Additionally, FDIC officials said that noninterest expenses have  decreased or remained flat since the financial crisis. Further, FDIC  officials stated that the Dodd-Frank Act did not appear to have conferred  a negative effect. For example, they noted that since 2010, small banks  have increased loan growth and their earnings have improved. Officials  from OCC said that the benefits of the Dodd-Frank Act would be difficult  to quantify, but OCC and CFTC officials stated that having a safer and  sounder financial system is a benefit of the Dodd-Frank Act. In our prior  work on federal rulemaking, many agency officials told us that monetizing  benefits is more difficult than monetizing costs.
OCC, FDIC, and the Federal Reserve have been conducting  retrospective reviews of their rules pursuant to EGRPRA, while NCUA  and CFPB have been conducting retrospective reviews pursuant to other  requirements and internal policies. These reviews include Dodd-Frank Act  rules.  As part of their review, agencies have requested comments from  the public on the impact on the community banks and conducted outreach  meetings, including an outreach meeting with those in rural areas. In past  work, we have noted the usefulness of retrospective reviews.
CFPB, which is not subject to EGRPRA, conducts its own analyses of  regulations that impact financial institutions with $10 billion or less in  assets. Section 1022(d) of the Dodd-Frank Act requires CFPB to assess  each significant rule it adopts under federal consumer financial law and  publish a report of the assessment not later than 5 years after the  effective date of such rule. The assessment must address, among other  relevant factors, the rule’s effectiveness in meeting the purposes and  objectives of Title X of the Dodd-Frank Act, and the specific goals stated  by the CFPB. According to CFPB officials, the review conducted for each  significant rule is to include broad data analysis. In our June 2015 report  on mortgage reforms, we found that CFPB has begun planning for review  of the qualified mortgage regulations. Regulators also said they are  aware of industry concerns about the potential for unintended impacts  from Dodd-Frank Act rulemaking and implementations. Representatives  from community banks, credit unions, and industry associations  expressed concern about future “trickledown effects” from regulations  intended for large banking institutions and one-size-fits-all regulation on  community banks and credit unions. For example, representatives from  community banks and credit unions we interviewed stated that while  CFPB exempts them from certain rules or parts of the rules, their  prudential regulators might hold them to regulatory standards for larger  institutions as a best practice. Additionally, some industry associations  have expressed concerns about a one-size-fits-all approach in regulating  community banks and credit unions as well as large banking institutions.  FDIC and Federal Reserve officials stated that they have heard similar  concerns from the institutions they regulate. FDIC officials stated that the  agency has emphasized that best practices are not requirements and that  FDIC has been monitoring its examiners to help ensure they are following  FDIC policies, which take into consideration the size, complexity, and risk  profiles of banks. Federal Reserve officials said that the Federal Reserve  has set expectations for its examiners to not examine regional banks  using the same requirements as for large banking institutions.  Additionally, Federal Reserve officials said the agency has tried to  communicate the applicability of rules clearly to smaller institutions.
section_title: Indicators Provide Baselines for Monitoring the Future Impact of the Dodd-Frank Act on Small Banks and Credit Unions
paragraphs: We developed indicators that, although imperfect, may shed light on the  cumulative impact of Dodd-Frank Act regulations on small banks and  credit unions over time. These indicators are likely to capture some of the  cost associated with regulatory compliance and include: (1) the number of  employees; (2) a measure of labor and other noncapital costs; (3)  profitability; and (4) residential mortgage lending. As we have discussed,  both mortgage-related rules and certain nonmortgage-related rules may  increase the compliance burden for small banks and credit unions. Banks  and credit unions may have to hire additional staff to manage compliance  with regulations, hire outside counsel or consultants, or take other  actions. As a result, the numbers of employees and the total cost of  resources other than funding at banks and credit unions are likely to  increase and profits are likely to decrease, all else being equal. Also, as  discussed earlier, mortgage-related rules may affect mortgage lending by  small banks and credit unions. Residential mortgage-related regulations,  in particular, may raise the cost of originating loans and result in a shifting  of portfolios away from residential lending. All else being equal,  residential mortgage lending by small banks and credit unions is likely to  decrease as a result.
While these indicators are baselines against which to compare future  trends between different sized institutions, they are limited in their ability  to assess the regulatory burden associated with the Dodd-Frank Act and  care should be used in interpreting the results of this analysis. First, the  level of, and trends in, these indicators for the various groups of  institutions does not provide evidence on the impact of Dodd-Frank at this  time. Going forward, the differences in the trends for each quintile would  be the more important indicator to monitor.  Second, even when assessed  over time and across different size institutions, our analysis cannot rule  out other important factors that may influence our indicators, including  other regulations, policies, and general macroeconomic conditions, such  as the demand for credit. Furthermore, trends in our indicators are  generally representative of trends for banks and credit unions of different  sizes, but may not reflect the experience of every bank or credit union.  Moreover, many of the Dodd-Frank Act regulations that apply to small  banks and credit unions have not been implemented or have been  implemented only recently.  Finally, while we presented similar indicators  for banks and credit unions, comparisons between the two types of  institutions on the basis of these measures may not be appropriate and  certain indicators may be more relevant than others for each type of  institution.
Figure 1 summarizes trends in our indicators for banks of different sizes.  We used total assets to measure size and grouped banks into five equal- sized groups, or quintiles, based on total assets. The first quintile  represents the smallest banks while the fifth quintile represents the  largest. We then calculated the median value of each indicator for each  quintile for each quarter. Our indicators for banks allow for the following  observations:
Smaller banks tend to have more employees per $1 million in assets  than larger banks, and employment at banks of all sizes generally has  fallen since the third quarter of 2010.
Smaller banks tend to have slightly higher noninterest expenses (e.g.,  salaries and employee benefits, consulting and advisory expenses) as  a percentage of assets than larger banks, and noninterest expenses  generally have fallen for banks of all sizes since the third quarter of  2010.
Smaller banks tend to have lower earnings as a percentage of assets  than larger banks, at least in recent quarters, and earnings generally  have increased for banks of all sizes since the third quarter of 2010.
The smallest banks tend to have fewer residential mortgage loans on  their balance sheets as a percentage of assets than larger banks.  However, since the third quarter of 2010, residential mortgage loans  have grown as a fraction of assets for banks of all sizes.
Figure 2 summarizes trends in our indicators for credit unions of different  sizes. As we did with banks, we used total assets to measure size and  grouped credit unions into quintiles based on total assets and then  calculated the median value of each indicator for each quintile for each  quarter. Again, the current level of these indicators and the trends for  each quintile are not sufficient for assessing the impact of the Dodd-Frank  Act. Nevertheless, our indicators for credit unions allow for the following  observations:
Smaller credit unions tend to have more full-time employees per $1  million than larger credit unions with the exception of the smallest,  which tend to have no full-time employees at all. Furthermore, smaller  credit unions tend to have more part-time employees per $1 million in  assets than larger credit unions. However, the numbers of both full- time and part-time employees generally have decreased since the  third quarter of 2010.
Noninterest expenses as a percentage of assets are generally the  same for credit unions of different sizes and generally have decreased  for credit unions of all sizes since the third quarter of 2010.
Smaller credit unions tend to have lower earnings as a percentage of  assets than larger credit unions, but earnings at credit unions of all  sizes generally have increased since the third quarter of 2010.
Smaller credit unions tend to have fewer residential mortgage loans  on their balance sheets as a percentage of assets than larger credit  unions, and most of the smallest credit unions have no residential  mortgages at all. However, residential mortgages generally have  decreased as a percentage of assets for larger credit unions —those  in the third, fourth, and fifth quintiles—but have increased for the  smaller credit unions in the second quintile.
section_title: Possible Impacts of the Dodd-Frank Act on Bank SIFIs, Designated Nonbanks, and Swaps
paragraphs: Financial regulators have continued to implement reforms pursuant to the  Dodd-Frank Act, but the full impact of the act remains uncertain. This  uncertainty stems from a number of factors, in particular, not all rules  have been finalized and taken effect. When the act’s reforms are fully  implemented, it will take time for the financial services industry to comply  with the array of new regulations—meaning additional time will need to  elapse to measure the impact of the rules. Moreover, the evolving nature  of implementation makes isolating the Dodd-Frank Act’s effect on the  U.S. financial marketplace difficult. This task is confounded by the many  factors that can affect the financial marketplace, including factors that  could have an even greater impact than the act.
Recognizing these limitations and difficulties, we developed a  multipronged approach to analyze current data and trends that might  indicate some of the Dodd-Frank Act’s initial impacts. First, using data  through the second quarter of 2015, we updated the indicators developed  in our December 2012 report to monitor changes in certain characteristics  of SIFIs, which are subject to enhanced prudential standards and  oversight under the act, and also developed new indicators. Second, we  updated our difference-in-difference econometric analysis to infer the  act’s impact on funding costs for bank SIFIs and the safety and  soundness of bank SIFIs. Third, we developed indicators of designated  nonbanks that parallel our bank SIFI indicators. Fourth, using data  through the second quarter of 2014, we updated indicators developed in  our December 2013 report to monitor the extent to which certain of the  act’s swap reforms are consistent with the act’s goals of reducing risk.  All of these analyses have limitations, which we discuss below.
subsections: section_title: Indicators Suggest Large Bank SIFIs Have Become Larger but Less Vulnerable to Financial Distress Since the Dodd- Frank Act
paragraphs: According to its legislative history, the Dodd-Frank Act contains  provisions intended to reduce the risk of failure of a large, complex  financial institution and the damage that such a failure could do to the  economy. Such provisions include (1) authorizing FSOC to designate a  nonbank financial company for Federal Reserve supervision if FSOC  determines it could pose a threat to U.S. financial stability and (2)  directing the Federal Reserve to impose enhanced prudential standards  and oversight on bank holding companies with $50 billion or more in total  consolidated assets (bank SIFIs) and nonbank financial companies  designated by FSOC (designated nonbanks). (See app. IV for a summary  of provisions related to SIFIs and their rulemaking status.)
As we first reported in December 2012, the Dodd-Frank Act and its  implementing rules may result in adjustments to the size,  interconnectedness, complexity, leverage, or liquidity of bank SIFIs over  time. We updated the indicators we developed in our December 2012  report and updated in our December 2013 and December 2014 reports to  monitor changes in some of these characteristics of SIFIs. In addition,  we added indicators of interconnectedness. The size,  interconnectedness, and complexity indicators reflect the potential for the  financial distress of a single SIFI to affect the financial system and  economy (spillover effects). The leverage and liquidity indicators reflect a  SIFI’s resilience to shocks or its vulnerability to financial distress.
It is important to note however, that our analysis has limitations. For  example, the indicators do not identify causal links between changes in  SIFI characteristics and the act. Rather, the indicators track changes in  the size, interconnectedness, complexity, leverage, and liquidity of SIFIs  since the passage of the act to examine if the changes have been  consistent with the goals of the act. However, other factors—including  international banking standards agreed upon by the Basel Committee on  Banking Supervision (Basel Committee) and monetary policy actions— also affect bank holding companies and, thus, the indicators. These  factors may have a greater effect than the Dodd-Frank Act on SIFIs.  Furthermore, because a number of rules implementing provisions related  to SIFIs have not yet been finalized, our indicators include the effects of  these rules only insofar as SIFIs have changed their behavior in response  to issued rules or in anticipation of expected rules. In this regard, our  indicators provide baselines against which to compare future trends. See  appendix VI for additional limitations of our indicators.
Table 5 summarizes the changes in our bank SIFI indicators from the  third quarter of 2010 through the second quarter of 2015 and allows for  the following observations (see app. VI for more information):
Changes in some size, interconnectedness, and complexity indicators  are consistent with increased potential spillover effects for large bank  SIFIs (which we define as bank holding companies with $500 billion or  more in assets) while changes in others are consistent with decreased  potential spillover effects for large bank SIFIs.
Changes in all of the size, interconnectedness, and complexity  indicators are consistent with decreased or no change in potential  spillover effects for other bank SIFIs (which we define as bank holding  companies with at least $50 billion but less than $500 billion in  assets).
Changes in all of our leverage and liquidity indicators are consistent  with increased resilience for both large bank SIFIs and for other bank  SIFIs.
section_title: Enhanced Prudential Standards Associated with Some Improvements in Bank SIFI Safety and Soundness but Not with Changes in Funding Costs for Bank SIFIs
paragraphs: The act requires the Federal Reserve to impose a variety of regulatory  reforms on SIFIs, including enhanced risk-based capital, leverage, and  liquidity requirements. These reforms may affect the safety and  soundness of bank SIFIs and the funding costs for bank SIFIs.  Specifically, capital and leverage requirements may help reduce the  probability of bank failures and promote financial stability. However, by  increasing funding costs for banks, the requirements might also cause  banks to raise lending rates and limit their ability to provide credit,  especially during a crisis. Similarly, while stricter liquidity requirements  may help reduce the probability of bank failures and promote financial  stability, banks could respond to these requirements by increasing  lending spreads to offset lower yields on assets or higher costs  associated with liabilities with longer maturities. To the extent that they  increase the cost and reduce the availability of credit, these reforms may  lead to reduced output and economic growth.
Our analysis shows an association between the Dodd-Frank Act and an  increase in some indicators of SIFI safety and soundness. However, we  find no evidence of an association between the Dodd-Frank Act and  increased funding costs for bank SIFIs. Our econometric analysis  leverages the Dodd-Frank Act requirement that bank holding companies  with total consolidated assets of $50 billion or more are subject to  enhanced regulation by the Federal Reserve but other bank holding  companies are not. Specifically, we compare funding costs, capital  adequacy, asset quality, earnings, and liquidity for bank SIFIs and non- SIFI bank holding companies before and after enactment of the Dodd- Frank Act. All else being equal, the difference in the comparative  differences is the inferred effect of the Dodd-Frank Act’s prudential  requirements on bank SIFIs.
Our approach allows us to partially differentiate changes in funding costs,  capital adequacy, asset quality, earnings, and liquidity associated with the  Dodd-Frank Act from changes due to other factors. However, several  factors make isolating and measuring the impact of the act’s new  requirements for SIFIs challenging. For example, the effects of the act  cannot be differentiated from the effects of simultaneous changes in  economic conditions, such as the pace of the recovery from the recent  recession; regulations, such as those stemming from Basel III; or other  changes, such as changes in credit ratings that differentially may affect  bank SIFIs and other bank holding companies. In addition, some of the  new requirements for SIFIs have yet to be fully implemented. For  example, in August 2015, the Federal Reserve issued a final rule that  established risk-based capital surcharges for the largest, most  interconnected SIFIs. Nevertheless, our estimates are suggestive of the  initial effects of the act on bank SIFIs and provide a baseline against  which to compare future trends.
Our analysis suggests that the Dodd-Frank Act has not been associated  with a significant change in funding costs for bank SIFIs (see table 6). Our  measure of funding cost captures the interest paid on borrowed funds and  deposits. To the extent that the cost of credit provided by bank SIFIs is a  function of their funding costs, the new requirements for SIFIs appear to  have had little effect on the aggregate cost of credit to date via the  funding cost channel.
Our estimates also suggest that the Dodd-Frank Act is associated with  improvements in some measures of bank SIFIs’ safety and soundness.  Bank SIFIs appear to be holding more tangible common equity as a  percentage of assets than they otherwise would have held since Dodd- Frank Act enactment (see table 6). The quality of assets on the balance  sheets of bank SIFIs seems to have improved since enactment. The act  is also associated with improved liquidity as measured by the extent to  which a bank holding company is using stable sources of funding and  with higher earnings. However, capital adequacy as measured by total  bank holding company equity and liquidity as measured by the capacity of  a bank holding company’s liquid assets to cover its volatile liabilities have  not clearly improved since enactment. Thus, the Dodd-Frank Act appears  to be associated with improvements in some indicators of safety and  soundness for bank SIFIs (relative to non-SIFI bank holding companies)  but not others. See appendix VI for more details on our regression  analysis.
section_title: Indicators for Designated Nonbanks Provide Baselines for Assessing the Future Impact of Dodd-Frank Act Reforms
paragraphs: We developed indicators associated with size, interconnectedness,  leverage, and liquidity for institutions whose material financial distress or  activities FSOC determines could pose a threat to U.S. financial stability  and therefore should be subject to Federal Reserve supervision and  enhanced prudential standards. As of July 2015, FSOC has designated  four nonbank financial companies—American International Group, Inc.  (AIG) and General Electric Capital Corporation (GECC) in July 2013,  Prudential Financial, Inc. (Prudential) in September 2013, and MetLife,  Inc. (MetLife) in December 2014. FSOC has determined that each of  these institutions was predominately engaged in financial activities (that  is, at least 85 percent of their revenues were derived from, or more than  85 percent of their assets were related to, activities that were financial in  nature). According to FSOC, at the time of the determinations, AIG was  the third-largest insurance company in the United States and one of the  largest insurers in the world; GECC was one of the largest holding  companies in the United States and a significant source of credit to  commercial and consumer customers; Prudential was one of the largest  financial services companies in the United States providing a wide array  of financial services, including group and individual life insurance,  annuities, retirement-related products and services, and asset  management; and MetLife was the largest publicly traded U.S. insurance  organization and one of the largest financial services companies in the  United States.
As we first reported in December 2012, the Dodd-Frank Act and its  implementing rules may result in adjustments to size, interconnectedness,  leverage, and liquidity characteristics of designated nonbanks over time.  Size and interconnectedness reflect the potential for the financial distress  of a single designated nonbank to affect the financial system and  economy, while leverage and liquidity reflect a designated nonbank’s  resilience to shocks or its vulnerability to financial distress. We developed  the following indicators based on the characteristics of companies that  FSOC reviews as part of its process for designating nonbanks:
Size. Our indicator of size is total consolidated assets.
Interconnectedness. Our indicators of interconnectedness are gross  notional amounts of credit default swaps outstanding for which the  designated nonbank is the reference entity and total debt outstanding  (excluding deposit liabilities).
Leverage. Our indicator of leverage is total equity as a percentage of  total consolidated assets (excluding separate account assets).
Liquidity. Our indicator of liquidity is short-term debt (excluding deposit  liabilities) as a percentage of total consolidated assets (excluding  separate account assets).
We calculated each indicator for each designated nonbank for each  quarter from the second quarter of 2012 to the second quarter of 2015.  We also calculated the medians of each indicator for publicly traded  banks and insurance companies with total consolidated assets of $50  billion or more to provide a frame of reference.
Like our indicators for bank SIFIs, our indicators for designated nonbanks  have some limitations. For example, the indicators do not identify causal  links between changes in designated nonbanks’ characteristics and the  act. Rather, the indicators track changes in the size, interconnectedness,  leverage, and liquidity of designated nonbanks since the passage of the  act to examine if the changes have been consistent with the goals of the  act. However, other factors, such as capital standards for large,  internationally active insurance companies may also affect designated  nonbanks and, thus, the indicators. Furthermore, to the extent that a  number of rules implementing provisions related to designated nonbanks  have not yet been finalized, our indicators include the effects of these  rules only insofar as designated nonbanks have changed their behavior in  response to issued rules or in anticipation of expected rules. In this  regard, our indicators provide baselines against which to compare future  trends.
Figure 3 below shows the indicators for the period from second quarter  2012 through second quarter 2015. As of July 2015, the Federal Reserve  issued specific rules requiring designated nonbank financial companies to  conduct resolution planning and stress testing, but additional rules are  forthcoming. Thus, the current values of our indicators are baselines  against which to compare future trends as more rules for designated  nonbanks are implemented. Our indicators allow for the following  observations:
Based on their total assets, all four designated nonbanks are relatively  large. They are all larger than the median publicly traded bank or  insurance company with assets of $50 billion or more.
Gross notional amounts of credit default swaps outstanding (for which  designated nonbanks are the reference entities) have decreased  since the second quarter of 2012, suggesting that the designated  nonbanks are relatively less interconnected and thus have smaller  potential spillover effects than in prior years by this measure, all else  being equal.
Total debt outstanding for one designated nonbank is relatively high,  suggesting that it is more interconnected and thus has larger potential  spillover effects than the other three designated nonbanks by this  measure, all else being equal.
Total equity as a percentage of nonseparate account assets varies  across the four designated nonbanks, ranging from less than 10  percent to almost 25 percent in the second quarter of 2015. This  variation in leverage suggests that the designated nonbanks have  varying resilience to shocks and financial distress by this measure, all  else being equal.
Short-term debt as a percentage of nonseparate account assets for  one designated nonbank is relatively high, suggesting that it faces  greater liquidity risk and is relatively less resilient than the other three  designated nonbanks by this measure, all else being equal.
section_title: Indicators Suggest That the Dodd-Frank Act Is Associated with Increased Use of Margin Collateral in Over-the-Counter Derivatives Transactions
paragraphs: As we reported in December 2013, once fully implemented, some  provisions in Title VII of the Dodd-Frank Act may help reduce systemic  risks to financial markets by increasing margins posted for uncleared  swaps. Using data through the second quarter of 2015, we updated the  set of indicators that we developed in our December 2013 report and  updated in our December 2014 report to measure changes in the use of  margin collateral for over-the-counter derivatives. This set of indicators  may shed light on changes in the use of margin collateral associated with  Dodd-Frank Act swap reforms as they are implemented, but has several  key limitations, as described later in this section.
Our margin indicators measure the fair value of collateral pledged by  counterparties to secure over-the-counter derivatives contracts as a  percentage of net current credit exposure to those counterparties for bank  holding companies. To protect itself from the loss it would incur if a  counterparty defaulted on a derivative contract, a swap entity could  require counterparties to post margin collateral in an amount equal to or  greater than its exposure to the contracts. An increase in collateral as a  percentage of credit exposure suggests that holding companies have  required their counterparties to post a greater amount of collateral against  their credit exposure due to derivatives contracts overall, which would be  consistent with the purposes of the act’s swap reforms.
Figure 4 shows trends in our margin indicators from the second quarter of  2009 through the second quarter of 2015. The rate of collateralization of  net current credit exposure to all counterparties has increased from about  71 percent in the third quarter of 2010 to about 104 percent in the second  quarter of 2015, suggesting that holding companies generally required  their counterparties to post a greater amount of collateral against their  derivatives contracts. However, as discussed later, aggregate measures  of collateralization rates can mask differences in collateralization rates for  different counterparty types.
Collateral posted by type of counterparty—banks and securities firms,  monoline financial guarantors, hedge funds, sovereign governments, and  corporate and all other counterparties—has increased (as a percentage  of net credit exposure) between the third quarter of 2010 and the second  quarter of 2015. However, the rate of collateralization consistently  differed by the type of counterparty, with hedge funds consistently posting  more collateral as a percentage of credit exposure than other types of  counterparties. As we reported in December 2013, according to OCC, the  rates differ partly because swap dealers may require certain  counterparties to post both initial and variation margin and other  counterparties to post only variation margin. Depending on how the  margin rules are finalized, the rates of collateralization for some  counterparties may increase.
Our margin indicators, while suggestive, are subject to important  limitations. First, they do not identify causal links between changes in  collateralization and the Dodd-Frank Act, including its regulations. Rather,  the set of indicators tracks changes in collateralization since the act’s  passage to examine if the changes were consistent with the act’s goals  for increasing collateralization. Second, both net current credit exposure  and the fair value of collateral are as of a point in time because the fair  values of derivatives contracts and collateral can fluctuate over time.  Third, an average collateralization of 100 percent does not ensure that all  current counterparty exposures have been eliminated, because one  counterparty’s credit exposure may be overcollateralized and another’s  undercollateralized. Fourth, our indicators measure the fair value of the  collateral held against net current credit exposures but do not necessarily  measure the risk of uncollateralized losses. The fair value of net current  credit exposure does not fully account for the riskiness of any single swap  contract. If a party has entered into riskier swaps, it is possible for the rate  of collateralization to increase while the risk of uncollateralized losses  also increases. Fifth, our indicators are market aggregates that may not  reflect the collateralization rate for any single company. Finally, these  indicators do not reflect collateralization rates for companies, such as  stand-alone broker-dealers, that have credit exposure to counterparties in  over-the-counter derivatives contracts but are not affiliated with a bank  holding company.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to CFPB, Federal Reserve, FDIC, OCC,  NCUA, SEC, CFTC, and Treasury for review and comment.  NCUA  provided written comments that we have reprinted in appendix VIII.  The  regulators also provided technical comments, which we have  incorporated, as appropriate.
In its comment letter, NCUA concurred with our report and noted it  acknowledges the difficulty of clearly identifying the impact of the Dodd- Frank Act regulations on community banks, credit unions and  systemically important financial institutions. However, it said that it would  like to see a deeper consideration of structure of the credit union industry,  which may help to more clearly illustrate the effects of the Dodd-Frank Act  on this sector. NCUA suggested using a set of indicators better-calibrated  to credit union business models, which may be more helpful in assessing  the effects of the Dodd-Frank Act on smaller credit unions. NCUA noted  that despite caveats in our report, indicating comparisons between the  credit union and community banking sectors may not be appropriate  because readers with limited background in these sectors may not be  able to judge the extent of the differences between these institutions.
While we maintain that the indicators we developed are reasonable, in the  report, we acknowledged that they are imperfect and have limitations.   Specifically, as we noted in the report, these indicators developed for  various sizes of credit unions do not reflect the experience of every  individual credit union. We also stated in the report that while we  presented similar indicators for banks and credit unions, comparisons  between the two types of institutions may not be appropriate and that  certain indicators may be more relevant than others for each type of  institution. We also acknowledged in the report that these indicators are  baselines against which to compare future trends between different sized  credit unions, they are limited in their ability to assess the cumulative  impact of Dodd-Frank Act regulations, and that care should be used in  interpreting the results of this analysis.
We are sending copies of this report to the appropriate congressional  committees and members, federal financial regulators, and the  Department of the Treasury. This report will also be available at no  charge on our website at http://www.gao.gov.
Should you or your staff have questions concerning this report, please  contact me at (202) 512-8678 or evansL@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix IX.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Under the Dodd-Frank Wall Street Reform and Consumer Protection Act  (Dodd-Frank Act), various federal agencies are directed or have the  authority to issue hundreds of regulations to implement the act’s  provisions. This report examines  regulatory analyses conducted by the federal financial regulators and  the Department of the Treasury (Treasury) in their Dodd-Frank Act  rulemakings, including their assessments of which rules they  considered to be major rules, and coordination between and among  federal regulators on these rulemakings; possible impact of promulgated Dodd-Frank Act provisions on  community banks and credit unions and their business activities; and possible impact of selected Dodd-Frank Act provisions and their  implementing regulations on financial market stability.
The agencies covered in our review are the federal financial regulators,  the Financial Stability Oversight Council (FSOC), and the Treasury. We  use the term “federal financial regulators” to refer to the Bureau of  Consumer Financial Protection (commonly known as the Consumer  Financial Protection Bureau, or CFPB), Commodity Futures Trading  Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), the  Board of Governors of the Federal Reserve System (Federal Reserve),  Office of the Comptroller of the Currency (OCC), National Credit Union  Administration (NCUA), and Securities and Exchange Commission  (SEC).
To examine the regulatory analyses and coordination conducted by the  federal financial regulators and Treasury, we focused our analysis on the  final rules issued pursuant to the Dodd-Frank Act that became effective  from July 23, 2014, through July 22, 2015, a total of 26 rules (see app.
II). We compiled these rules from a website maintained by the Federal  Reserve Bank of St. Louis that tracks Dodd-Frank Act regulations. We  corroborated this information with staff from CFPB, Federal Reserve,  FDIC, OCC, NCUA, SEC, CFTC, and the Treasury. We asked these staff  to identify any other rulemaking that should be included. We reviewed  federal statutes, regulations, and GAO studies on these rules as well as  Federal Register releases that contain information on the regulatory  analyses conducted by agencies and their coordination efforts. Using  these materials, we identified the regulatory analyses, including benefit- cost analysis, required to be conducted by the agencies as part of their  Dodd-Frank Act rulemakings. Of the 26 rules in our scope, 15 were  substantive regulations, meaning that they were generally subject to  public notice and comment under the Administrative Procedure Act  (APA)—and also required the agencies to conduct some form of  regulatory analysis. For each of the 15 rules, we reviewed the Federal  Register release of the final rule document and summarized the analyses  conducted by the regulators and Treasury. Using GAO’s Federal Rules  database, we found that 6 of the 15 rules were classified by the Office of  Management and Budget as major rules under the Congressional Review  Act (CRA). That is, they resulted or are likely to result in an annual impact  on the economy of $100 million or more, a major increase in costs or  prices, or significant adverse effects on competition, employment,  investment, productivity, innovation, or on the ability of U.S.-based  enterprises to compete with foreign-based enterprises in domestic or  export markets. For agencies subject to Executive Order (E.O.) 12,866,  such major rules would be considered significant regulatory actions and  subject to formal cost-benefit analysis. We developed a data collection  instrument to compare and assess the regulatory analysis conducted for  the major rules against the principles outlined in OMB Circular A-4, which  provides guidance to federal agencies on the development of regulatory  analysis.
We also reviewed the Dodd-Frank Act and Federal Register releases to  identify the interagency coordination or consultation requirements as  required by the act for the 26 rules in our scope. As a part of this review,  an analyst looked for key words relating to coordination in the Federal  Register releases and the requirements for coordination in the Dodd- Frank Act and recorded this information in a spreadsheet. An attorney  then reviewed related rulemakings and acts and also independently  evaluated each determination documented in the spreadsheet to reach  concurrence on the assessment.
To assess the possible impact of the Dodd-Frank Act on community  banks and credit unions, we used our September 2012 report, which  identified provisions expected to affect some or all community banks and  credit unions, to identify select final rules that became effective by  October 2015. While we started with a larger population of rules, we  specifically reviewed nine final rules that were identified by the community  banks and credit unions as potentially having an impact for the purpose of  this report. We reviewed the Federal Register releases for these final  rules and relevant material on the act and the final rules, as well as five  studies by federal and state regulators, industry associations, and  academics on the potential impact of the final rules on community banks  and credit unions. All but one study we reviewed relied on surveys of  banks, usually contacted through banking association member lists. The  final study consisted of a study of all payment card networks. We  identified these studies through electronic searches of Google and  Google Scholar using keywords such as the name of the rule and “impact  on community banks or credit unions.” Two GAO social science analysts  reviewed the quality of each study’s research design and methods and  identified related limitations. Because most of the studies relied on  surveys of non-probability, convenience samples of banks with low  response rates, the study results cannot be used to make inferences  about the population of all small banks. However, the results do provide  useful insights into the experiences of surveyed banks with Dodd-Frank  Act rules.
We conducted semi-structured interviews with federal regulators, the  Independent Community Bankers of America (ICBA), the Credit Union  National Association (CUNA), the National Federation of Independent  Business, the U.S. Chamber of Commerce, and a non-generalizable  sample of four state credit union and community bank associations and  eight community banks and credit unions about the impact of the final  rules on community banks and credit unions. Between July and  September 2015, we interviewed representatives from two state  community banking and two state credit union associations from Georgia,  Illinois, Louisiana, and Pennsylvania. We also interviewed representatives  from four community banks and four credit unions that fell in each of the  four asset categories: under $250 million, between $250 million and $500  million, between $500 million and $1 billion, and between $1 billion and  $10 billion. In determining our sample, we relied to the extent possible on  entities interviewed for our September 2012 report for continuity. As two  state bank community banking and credit union associations that we  previously interviewed declined to be re-interviewed, we used a  methodology similar to our September 2012 report to select  replacements. Using SNL Financial data on the number and percentage  of banks and credit unions in each state within different asset classes, we  selected one state banking association and one state credit union  association that (1) represented a higher-than-average percentage of  institutions within specific asset classes and (2) represented a larger  number of institutions within that asset class than other states.
Additionally, we interviewed three community banks and two credit unions  that we previously interviewed in our September 2012 report and  randomly selected and interviewed one community bank and two credit  unions for the remainder. While the information we obtained from the  interviews provides useful insights, it cannot be used to make  generalizations about the experiences of all community banks and credit  unions since the selection of interviewees relied on non-probability  sampling methods. Nevertheless, we purposely sought to achieve variety  in our sample as a way to gain access to a range of experiences within  the target population.
We also analyzed bank quarterly Reports of Condition and Income (Call  Reports) data for depository institutions and credit unions obtained from  FFIEC and NCUA, respectively, from the first quarter of 2006 through the  second quarter of 2015. We used these data to construct indicators of the  cumulative costs associated with complying with Dodd-Frank Act  regulations, including numbers of employees per $1 million in assets,  non-interest expenses as a percentage of assets, and earnings as a  percentage of assets. We used the same data to construct indicators  associated with business lines that may be affected by Dodd-Frank Act  regulations, including residential mortgage lending as a percentage of  assets. We assessed the reliability of the FFIEC and NCUA data by  reviewing relevant documentation and electronically testing the data for  missing values, outliers, and invalid values, and we found the data to be  sufficiently reliable for purpose of constructing indicators associated with  compliance costs and business lines for banks and credit unions.  Although we analyzed the impact of a number of specific Dodd-Frank Act  provisions on community banks and credit unions, assessing the extent to  which these provisions or their related regulations should apply to such  institutions was beyond the scope of our work.
To analyze the impact of the Dodd-Frank Act on financial market stability,  we updated several indicators developed in our prior reports with data  through the second quarter of 2015. We also created new indicators for  banks that are systemically important financial institution (bank SIFI) and  nonbank financial institutions designated by the FSOC for supervision by  the Federal Reserve (designated nonbanks). We updated indicators to  monitor changes in size, complexity, leverage, and liquidity of bank SIFIs  and added new indicators of interconnectedness, which captures direct or  indirect linkages between financial institutions that may transmit distress  from one institution to another. We updated our econometric analysis  estimating changes in measures of the (1) funding cost for bank SIFIs  and (2) safety and soundness of bank SIFIs. Since we began developing  and tracking indicators for bank SIFIs, FSOC has designated four  nonbank institutions for enhanced supervision by the Federal Reserve. As  such, we added new indicators associated with the size,  interconnectedness, leverage, and liquidity of these institutions. Finally,  we updated our indicators monitoring the extent to which certain swap  reforms are consistent with the act’s goals of reducing risk. For those  parts of our methodology that involved the analysis of computer- processed data from Bloomberg, the Federal Reserve Bank of Chicago,  the Federal Reserve, the National Information Center, and the Bureau of  Economic Analysis, we assessed the reliability of these data by reviewing  relevant documentation, and electronically testing the data for missing  values, outliers, and invalid values. We also interviewed Federal Reserve  staff about Federal Reserve’s data. We determined the data were  sufficiently reliable for our purposes—monitoring changes in SIFI  characteristics, estimating changes in the cost of credit bank SIFIs  provided and their safety and soundness, and assessing the amount of  margin collateral that over-the-counter derivatives counterparties used.
We conducted this performance audit from April 2015 to December 2015  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Dodd-Frank Act Rules Effective as of July 22, 2015
paragraphs: The following table lists the 26 Dodd-Frank Act rules that we identified as  having effective dates during the scope of our review—from July 23,  2014, through July 22, 2015. Fifteen of the rules were substantive— meaning they are generally subject to the notice and comment  requirements of the Administrative Procedure Act (APA)—and, of those, 6  were major.
section_title: Appendix III: Coordination for Dodd-Frank Act Rules Effective as of July 22, 2015
paragraphs: The following table lists the 26 Dodd-Frank Act rules that we identified as  having effective dates during the scope of our review (from July 23, 2014,  through July 22, 2015), whether the Dodd-Frank Act required interagency  or international coordination, and the nature of required coordination (if  any). The rulemaking agencies coordinated as required by the Dodd- Frank Act for 11 of the 26 regulations we reviewed (see app. III). For the  remaining 15 of the 26 rules we reviewed, the agencies were not required  by the Dodd-Frank Act to coordinate.
section_title: Appendix IV: Summary of Rulemakings Related to Selected Dodd-Frank Act Provisions Applicable to Designated Nonbanks
paragraphs: The Dodd-Frank Act contains several provisions—including designation  by the Financial Stability Oversight Council (FSOC) for supervision by the  Board of Governors of the Federal Reserve System (Federal Reserve)  and enhanced prudential standards—that apply to nonbank financial  companies if FSOC determines that material financial distress at the  company or the nature, scope, size, scale, concentration,  interconnectedness, or mix of activities at the company could pose a  threat to U.S. financial stability. Enhanced prudential standards also apply  to bank holding companies with $50 billion or more in total consolidated  assets. For this report, we refer to those nonbanks financial companies as  designated nonbanks and bank holding companies as systemically  important banks (bank SIFI), respectively. Table 9 summarizes some of  the Dodd-Frank Act provisions and the rulemakings, including their status,  to implement those provisions as of July 22, 2015.
section_title: Appendix V: Trends in GAO Indicators for Bank Systemically Important Financial Institutions
paragraphs: We developed indicators to monitor changes in the size,  interconnectedness, complexity, leverage, and liquidity of bank holding  companies with $50 billion or more in total consolidated assets (bank  systemically important financial institutions or bank SIFIs). As we first  reported in December 2012, some provisions of the Dodd-Frank Wall  Street Reform and Consumer Protection Act (Dodd-Frank Act) and  related rules may result in adjustments to the these characteristics of  bank SIFIs over time. The size, interconnectedness, and complexity  indicators are intended to capture the potential for a bank SIFI’s financial  distress to affect the financial system and economy (spillover effects).  The leverage and liquidity indicators are intended to capture a bank SIFI’s  resilience to shocks or its vulnerability to financial distress.
subsections: section_title: Data
paragraphs: We used the following data to construct our indicators: quarterly data on the price index for gross domestic product, which we  obtained from the Bureau of Economic Analysis for the period from  the second quarter of 2006 to the second quarter of 2015. annual data on numbers and locations of legal entities for holding  companies obtained from the Board of Governors of the Federal  Reserve System for the period from the second quarter of 2010 to the  second quarter of 2015. quarterly data on second tier bank holding companies, which we  obtained from the Board of Governors of the Federal Reserve System  via the National Information Center for the period from the second  quarter of 2006 to the second quarter of 2015. quarterly balance sheet and income statement data that bank holding  companies report on Form FR Y-9C, which we obtained from the  Federal Reserve Bank of Chicago for the period from the second  quarter of 2006 to the second quarter of 2015, and quarterly data on gross notional amounts of credit default swaps  outstanding by reference entity, which we obtained from Bloomberg  for the period from the third quarter of 2010 to the second quarter of  2015.
section_title: Sample
paragraphs: Our indicators analysis generally includes all top-tier U.S. bank holding  companies with total consolidated assets of $1 billion or more that filed  Form FR Y-9C for one or more quarters during the period from the first  quarter of 2006 to the second quarter of 2015, including any U.S.-based  bank holding company subsidiaries of foreign banking organizations that  on their own have total consolidated assets of $1 billion or more and that  filed Form FR Y-9C. We chose the threshold of $1 billion in assets to  match the threshold for reporting Form FR Y-9C starting in the first  quarter of 2015. We defined bank SIFIs as bank holding companies with  total assets of $50 billion or more. We defined large bank SIFIs as bank  holding companies with total assets of $500 billion or more and we  defined other bank SIFIs as bank holding companies with total assets of  at least $50 billion but less than $500 billion. We defined non-SIFI bank  holding companies as bank holding companies with less than $50 billion  in total assets.
section_title: Methodology
paragraphs: We calculate each of our indicators for each bank holding company in our  sample for each quarter from the first quarter of 2006 to the second  quarter of 2015, with the exceptions of our complexity indicators, which  we calculate only for bank SIFIs as of the second quarter of each year  from 2006 to 2015, and one of our interconnectedness indicators, which  we calculate only for bank SIFIs for the period from the third quarter of  2010 to the second quarter of 2015.. We then calculate the median value  of each indicator for each group of bank holding companies—large bank  SIFIs, other bank SIFIs, all bank SIFIs, non-SIFI bank holding companies,  and all bank holding companies, to the extent possible—and track the  median values over time. Finally, we assess the changes in the median  values of the indicators for large bank SIFIs and other banks SIFIs  between the second or third quarter of 2010 and the second quarter of  2015, depending on the indicator. We say that an indicator has increased  or decreased if it has changed by 5 percent or more, depending on the  direction of the change, and we say that an indicator has remained about  the same if it has changed by less than 5 percent.
section_title: Limitations
paragraphs: Our indicators analysis has limitations. For example, the indicators do not  identify causal links between changes in bank SIFI characteristics and the  act. Rather, the indicators track changes in the size, interconnectedness,  complexity, leverage, and liquidity of bank SIFIs since the Dodd-Frank Act  was passed to examine whether the changes were consistent with the  act. However, other factors—including the economic downturn,  international banking standards agreed upon by the Basel Committee on  Banking Supervision (Basel Committee), and monetary policy actions— also affect bank holding companies and, thus, the indicators. These  factors may have a greater effect on bank SIFIs than the Dodd-Frank Act.  In addition, some rules implementing bank SIFI-related provisions have  not yet been finalized or fully implemented. Thus, changes in our  indicators include the effects of these rules only insofar as bank SIFIs  have changed their behavior in response to issued rules and in  anticipation of expected rules. In this sense, our indicators provide  baselines against which to compare future trends. Furthermore, each  indicator has its own specific limitations, which we expand on below.
section_title: Indicators
subsections: section_title: Size
paragraphs: An institution’s size is associated with the potential for its financial  distress to affect the financial system and the broader economy (spillover  effects). We developed three indicators of size—the number of bank  holding companies with assets of $50 billion or more, total assets of the  consolidated bank holding company as reported on its balance sheet  (adjusted for inflation and measured in billions of second quarter 2015  dollars), and the market share of the bank holding company (equal to its  total assets as a percentage of the total assets of all of the holding  companies we analyzed).
These indicators do not include an institution’s off-balance-sheet activities  and thus may understate the amount of financial services or  intermediation an institution provides. Furthermore, asset size alone is not  an accurate determinant of systemic significance because an institution’s  systemic significance also depends on other factors, such as its  complexity and interconnectedness. Furthermore, some bank SIFIs are  U.S.-based bank holding company subsidiaries of foreign banking  organizations, and the size of these bank SIFIs may not reflect the  potential for the parent company’s financial distress to affect the financial  system and the economy.
We observed the following changes in our size indicators over the period  from the third quarter of 2010 to the second quarter of 2015:
The number of bank SIFIs had decreased by three between the third  quarter of 2010 and the second quarter of 2015. The number of large  bank SIFIs had decreased by one and the number of other bank SIFIs  had decreased by two.
Median assets of bank SIFIs had decreased by about 12 percent.
Median assets of large bank SIFIs have increased by about 35  percent, while median assets of other bank SIFIs had decreased by  about 9 percent.
Median market shares of bank SIFIs had decreased by about 7  percent. Median market shares of large bank SIFIs had increased by  about 42 percent while median market shares of other bank SIFIs had  remained about the same.
Interconnectedness reflects direct or indirect linkages between financial  institutions that may transmit distress from one financial institution to  another (spillover effects). We developed two indicators of  interconnectedness based on those that Financial Stability Oversight  Council uses in the first stage of its process for designating nonbank  SIFIs—gross notional amount of credit default swaps outstanding for  which the institution is the reference entity (adjusted for inflation and  measured in millions of second quarter 2015 dollars) and total debt  outstanding (adjusted for inflation and measured in second quarter 2015  dollars). We measure total debt outstanding as the difference between  total liabilities and total deposits.
We observed the following changes in our interconnectedness indicators:
Median credit default swaps gross notional amounts among bank  SIFIs that are reference entities have decreased by about 57 percent.  Median credit default swaps gross notional amounts for large bank  SIFIs that are reference entities have decreased by about 55 percent  while median credit default swaps gross notional amounts for other  bank SIFIs that are reference entities have decreased by about 75  percent. We note that few bank SIFIs are reference entities—only 6-7  large bank SIFIs are reference entities and only 3-4 other bank SIFIs  are reference entities in any one quarter.
Median total debt outstanding for bank SIFIs has decreased by about  32 percent. Median debt outstanding for large bank SIFIs has  decreased by about 21 percent, while median debt outstanding for  other bank SIFIs has decreased by about 9 percent.
Institutions that are more complex are likely to be more difficult to resolve  and therefore cause significantly greater disruption to the wider financial  system and economic activity if they fail (spillover effects). Resolution via  a bankruptcy or under the backstop orderly liquidation authority in title II  of Dodd-Frank Act may be more difficult if a large number of legal entities  or legal systems are involved. For example, a SIFI with a large number of  legal entities—particularly foreign ones operating in different countries  under different regulatory regimes—may be more difficult to resolve than  a SIFI with fewer legal entities in fewer countries.  We developed three  indicators of this type of complexity—the number of a bank SIFI’s legal  entities, the number of a bank SIFI’s foreign legal entities, and the  number of countries in which a bank SIFI’s foreign legal entities are  located.
A key limitation of our indicators is that they may not capture all relevant  aspects of the complexity of a SIFI, such as complexity that could result  from being a subsidiary of a foreign company.
We observed the following changes in our complexity indicators:
Median numbers of legal entities for bank SIFIs decreased by 25,  (about 19 percent). Median numbers of legal entities for large bank  SIFIs decreased by 534, (about 19 percent), and median numbers of  legal entities for other bank SIFIs decreased by 24, (about 22  percent).
Median numbers of foreign legal entities for bank SIFIs did not  change. However, median numbers of foreign legal entities for large  bank SIFIs increased by 143, (about 21 percent), and median  numbers of foreign legal entities for other bank SIFIs decreased by 2,  (about 33 percent).
Median numbers of countries in which foreign legal entities are  located for bank SIFIs did not change. Median numbers of countries in  which foreign legal entities are located for large bank SIFIs remained  about the same and median numbers of countries in which foreign  legal entities are located for other bank SIFIs decreased by 1, (about  25 percent).
Leverage generally captures the relationship between an institution’s  exposure to risk and capital that can be used to absorb losses from that  exposure (resilience). Institutions with more capital to absorb losses are  less likely to fail, all else being equal. We track two indicators of  leverage—a bank SIFI’s tangible common equity as a percentage of total  assets and a bank SIFI’s total bank holding company equity as a  percentage of total assets. We measure tangible common equity as bank  holding company equity capital minus preferred stock, goodwill, and other  intangible assets, plus mortgage servicing rights.
A limitation of both indicators is that they may not fully reflect an  institution’s exposure to risk because total assets do not reflect an  institution’s risk exposure from off-balance-sheet activities and generally  treat all assets as equally risky.
We observed the following changes in our leverage indicators between  the third quarter of 2010 and the second quarter of 2015:
Median tangible common equity as a percentage of assets for bank  SIFIs has increased by about 29 percent. Median tangible common  equity as a percentage of assets for large bank SIFIs has increased  by about 21 percent and median tangible common equity as a  percentage of assets for other bank SIFIs has increased by about 26  percent.
Median total equity as a percentage of assets for bank SIFIs has  increased by about 13 percent. Median total equity as a percentage of  assets for large bank SIFIs has increased by about 29 percent and  median total equity as a percentage of assets for other bank SIFIs has  increased by about 9 percent.
Liquidity represents the ability to fund assets and meet obligations as they  become due, and liquidity risk is the risk of not being able to obtain funds  at a reasonable price within a reasonable time period to meet obligations  as they become due. Institutions with more liquidity (and less liquidity  risk), are less likely to fail, all else being equal (resilience). We developed  two indicators of liquidity—short-term liabilities as a percentage of total  liabilities and liquid assets as a percentage of short-term liabilities. Short- term liabilities reflect an institution’s potential need for liquidity in the  short-term. We measure short-term liabilities as the sum of federal funds  purchased and repurchase agreements, trading liabilities (less derivatives  with negative fair value), other borrowed funds, deposits held in foreign  offices, and jumbo time deposits (deposits of $100,000 or more) held in  domestic offices. Liquid assets are assets that can be sold easily without  affecting their price and, thus, can be converted easily to cash to cover  debts that come due. Accordingly, liquid assets as a percentage of an  institution’s short-term liabilities are a measure of an institution’s capacity  to meet potential upcoming obligations. We measure liquid assets as the  sum of cash and balances due from depository institutions, securities  (less pledged securities), federal funds sold and reverse repurchases,  and trading assets.
A limitation of both indicators is that they do not include off balance sheet  liabilities, such as callable derivatives or other potential derivatives- related obligations. The second indicator also does not include off-  balance-sheet liquid assets, such as short-term income from derivative  contracts. Because these limitations affect both the numerator and the  denominator of our indicators, we cannot determine whether the  exclusion of off-balance-sheet items results in an under or an  overstatement of an institution’s liquidity need and access.
We observed the following changes in our liquidity indicators between the  third quarter of 2010 and the second quarter of 2015:
Median short-term liabilities as a percentage of total liabilities for bank  SIFIs have decreased by about 15 percent. Median short-term  liabilities as a percentage of total liabilities for large bank SIFIs have  decreased by about 20 percent, and median short-term liabilities as a  percentage of total liabilities for other bank SIFIs have decreased by  about 31 percent.
Median liquid assets as a percentage of short-term liabilities for bank  SIFIs have increased by about 70 percent. Median liquid assets as a  percentage of short-term liabilities for large bank SIFIs have increased  by about 51 percent, and median liquid assets as a percentage of  short-term liabilities for other bank SIFIs have increased by about 60  percent.
section_title: Appendix VI: Econometric Analyses of the Impact of Enhanced Regulation and Oversight on Systemically Important Financial Institutions
paragraphs: We updated our econometric analysis assessing the impacts of new  requirements in the Dodd- Frank Wall Street Reform and Consumer  Protection Act (Dodd-Frank Act) for bank holding companies with total  consolidated assets of $50 billion or more—bank systemically important  financial institutions or bank SIFIs—as they relate to (1) the funding costs  for bank SIFIs and (2) indicators of their safety and soundness.
subsections: section_title: Methodology
paragraphs: Our multivariate econometric model uses a difference-in-difference  design that exploits the fact that the Dodd-Frank Act subjects bank SIFIs  to enhanced regulation by the Board of Governors of the Federal Reserve  System (Federal Reserve) but not other holding companies, so we can  view bank SIFIs as the treatment group and other bank holding  companies as the control group. We compared the changes in the  characteristics of bank SIFIs over time with changes in the characteristics  of other bank holding companies over time. All else being equal, the  difference in the differences is the impact of new requirements for bank  SIFIs primarily tied to enhanced regulation and oversight under the  Federal Reserve.
Our general econometric specification is the following:  ybq = α + β + γSIFIbq + X’bqF + εbq,  where b denotes the bank holding company, q denotes the quarter, ybq is  the dependent variable, α is a bank holding company-specific intercept,  β is a quarter-specific intercept, SIFIbq is an indicator variable that equals  1 if bank holding company b is a SIFI in quarter q and 0 otherwise, Xbq is  a list of other independent variables, and εbq is an error term. We  estimated the parameters of the model using quarterly data on top-tier  bank holding companies that filed Form FR Y-9C from the first quarter of  2006 through the second quarter of 2015.
The parameter of interest is γ, the coefficient on the SIFI indicator, which  is equal to 1 for bank holding companies with consolidated assets of $50  billion or more in the quarters starting with the treatment start date and is  equal to zero otherwise. The Dodd-Frank Act was enacted in July 2010,  so the treatment start date is the third quarter of 2010. Thus, the  parameter γ measures the average difference in the difference in  dependent variable between bank SIFIs and other bank holding  companies before and after the Dodd-Frank Act was enacted.
We use different dependent variables (ybq) to estimate the impacts of the  new requirements for SIFIs on the cost of credit provided by bank SIFIs  and on various aspects of bank SIFIs’ safety and soundness, including  capital adequacy, asset quality, earnings, and liquidity.
Funding cost. A bank holding company’s funding cost is the cost of  deposits or liabilities that it then uses to make loans or otherwise  acquire assets. More specifically, a bank holding company’s funding  cost is the interest rate it pays when it borrows funds. All else being  equal, the greater a bank holding company’s funding cost, the greater  the interest rate it charges when it makes loans. We measure funding  cost as an institution’s interest expense as a percent of interest- bearing liabilities.
Capital adequacy. Capital absorbs losses, promotes public  confidence, helps restrict excessive asset growth, and provides  protection to creditors. We use two alternative measures of capital  adequacy: tangible common equity as a percentage of total assets  and total bank holding company equity as a percent of total assets.
Asset quality. Asset quality reflects the quantity of existing and  potential credit risk associated with the institution’s loan and  investment portfolios and other assets, as well as off-balance sheet  transactions. Asset quality also reflects the ability of management to  identify and manage credit risk. We measure asset quality as  performing assets as a percent of total assets, where performing  assets are equal to total assets less assets 90 days or more past due  and still accruing interest and assets in non-accrual status.
Earnings. Earnings are the initial safeguard against the risks of  engaging in the banking business and represent the first line of  defense against capital depletion that can result from declining asset  values. We measure earnings as net income as a percent of total  assets.
Liquidity. Liquidity represents the ability to fund assets and meet  obligations as they become due, and liquidity risk is the risk of not  being able to obtain funds at a reasonable price within a reasonable  time period to meet obligations as they become due. We use two  different variables to measure liquidity. The first variable is liquid  assets as a percent of volatile liabilities. This variable is similar in spirit  to the liquidity coverage ratio introduced by the Basel Committee on  Banking Supervision (Basel Committee) and measures a bank holding  company’s capacity to meet its liquidity needs under a significantly  severe liquidity stress scenario. We measure liquid assets as the sum  of cash and balances due from depository institutions, securities (less  pledged securities), federal funds sold and reverse repurchases, and  trading assets. We measure volatile (short-term) liabilities as the sum  of federal funds purchased and repurchase agreements, trading  liabilities (less derivatives with negative fair value), other borrowed  funds, deposits held in foreign offices, and jumbo time deposits  (deposits of $100,000 or more) held in domestic offices.
The second liquidity variable is stable liabilities as a percent of total  liabilities. This variable measures the extent to which a bank holding  company relies on stable funding sources to finance its assets and  activities. This variable is related in spirit to the net stable funding ratio  introduced by the Basel Committee, which measures the amount of stable  funding based on the liquidity characteristics of an institution’s assets and  activities over a 1-year horizon. We measure stable funding as total  liabilities minus volatile liabilities as described earlier.
Finally, we include a limited number of independent variables (Xbq) to  control for factors that may differentially affect SIFIs and non-SIFIs in the  quarters since the Dodd-Frank Act was enacted. We include these  variables to reduce the likelihood that our estimates are reflecting  something other than the impact of the new Dodd-Frank Act requirements  for SIFIs.
Securitization income. Bank holding companies with more income  from securitization are likely to have different business models than  those with more income from traditional banking associated with an  originate-to-hold strategy for loans. Changes in the market for  securitized products since enactment of the Dodd-Frank Act thus may  have had a greater effect on bank holding companies with more  securitization income. If bank SIFIs typically have more securitization  income than other bank holding companies, then changes in the  market for securitized products since enactment may have  differentially affected the two groups. We measure securitization  income as the sum of net servicing fees, net securitization income,  and interest and dividend income on mortgage-backed securities  minus associated interest expense, and express securitization as a  percent of operating revenue. Operating revenue is the sum of  interest income and noninterest income less interest expense and  loan loss provisions.
Nontraditional income. Nontraditional income generally captures  income from capital market activities. Bank holding companies with  more nontraditional income are likely to have different business  models than those with more income from traditional banking  activities. Changes in capital markets since enactment of the Dodd- Frank Act may have had a greater effect on bank holding companies  with more nontraditional income. If bank SIFIs typically have more  nontraditional income than other bank holding companies, then  changes in capital markets since enactment may have differentially  affected the two groups. We measure nontraditional income as the  sum of trading revenue; investment banking, advisory, brokerage, and  underwriting fees and commissions; venture capital revenue;  insurance commissions and fees; and interest income from trading  assets less associated interest expense, and we express  nontraditional income as a percent of operating revenue.
Foreign exposure. Changes in other countries, such as the sovereign  debt crisis in Europe, may have a larger effect on bank holding  companies with more foreign exposure. If bank SIFIs typically have  more foreign exposure than other bank holding companies, then  changes in foreign markets may have differentially affected the two  groups. We measure foreign exposure as the sum of foreign debt  securities (held-to-maturity and available-for-sale), foreign bank loans,  commercial and industrial loans to non-U.S. addresses, and foreign  government loans and we express foreign exposure as a percent of  total assets.
Size. We include size because bank SIFIs tend to be larger than other  bank holding companies, and market pressures or other forces not  otherwise accounted for may have differentially affected large and  small bank holding companies in the time since enactment of the  Dodd-Frank Act. We measure the size of a bank holding company as  the natural logarithm of its total assets.
Capital Purchase Program participation. We control for whether or not  a bank holding company participated in the Capital Purchase Program  component of the Troubled Asset Relief Program to differentiate any  impact that this program may have had from the impact of the Dodd- Frank Act.
We also conducted several sets of robustness checks:
We restricted our sample to the set of institutions with assets that are  “close” to the $50 billion cutoff for enhanced prudential regulation for  bank SIFIs. Specifically, we analyzed two restricted samples of bank  holding companies: (1) bank holding companies with assets between  $25 billion and $75 billion and (2) bank holding companies with assets  between $1 billion and $100 billion.
We examined different treatment start dates. Specifically, we allowed  the Dodd-Frank Act’s new requirements for SIFIs to have an impact in  the third quarter of 2009, 1 year before the passage of the act. We did  so to allow for the possibility that institutions began to react to the  act’s requirements in anticipation of the act being passed.
We allowed the effect of the treatment to vary by quarter to allow for  the possibility that the impact of the act varied over time.
section_title: Data
paragraphs: We conducted our analysis using quarterly data on top-tier U.S. bank  holding companies that filed Form FR Y-9C, including top-tier U.S.-based  bank holding company subsidiaries of foreign banking organizations. We  analyzed these companies for the period from the first quarter of 2006  through the second quarter of 2015. We obtained these data from the  Federal Reserve Bank of Chicago and the Board of Governors of the  Federal Reserve System.
section_title: Results
paragraphs: While some of the SIFI-related rulemakings have yet to be implemented,  our estimates are suggestive of the initial effects of the Dodd-Frank Act  on bank SIFIs and provide a baseline against which to compare future  results. Our baseline estimates suggest that the Dodd-Frank Act has not  been associated with a significant change in funding costs of bank SIFIs  (see table 15). To the extent that the cost of credit provided by bank SIFIs  is a function of their funding costs, the new requirements for SIFIs are  likely to have had little effect on the cost of credit to date through the  funding cost channel.
Our estimates also suggest that the Dodd-Frank Act is associated with  improvements in some measures of bank SIFIs’ safety and soundness.  Bank SIFIs appear to be holding more tangible common equity as a  percentage of assets than they otherwise would have held since Dodd- Frank Act enactment (see panel 1 in table 15). The quality of assets on  the balance sheets of bank SIFIs seems to have improved since  enactment. The act is also associated with improved liquidity as  measured by the extent to which a bank holding company is using stable  sources of funding and with higher earnings. However, capital adequacy  as measured by total bank holding company equity and liquidity as  measured by the capacity of a bank holding company’s liquid assets to  cover its volatile liabilities have not clearly improved since enactment.  Thus, the Dodd-Frank Act appears to be associated with improvements in  some indicators of safety and soundness for bank SIFIs (relative to non- SIFI bank holding companies) but not others.
Our approach allows us to partially differentiate changes in funding costs,  capital adequacy, asset quality, earnings, and liquidity associated with the  Dodd-Frank Act from changes due to other factors. However, several  factors make isolating and measuring the impact of the Dodd-Frank Act  requirements for SIFIs challenging. The effects of the act cannot be  differentiated from the effects of simultaneous changes in economic  conditions, such as the pace of the recovery from the recent recession, or  regulations, such as those stemming from Basel III, or other changes,  such as in credit ratings that differentially may affect bank SIFIs and other  bank holding companies. In addition, some of the new requirements for  SIFIs may not yet be fully implemented. Nevertheless, our estimates are  suggestive of the initial effects of the Dodd-Frank Act on bank SIFIs and  provide a baseline against which to compare future trends.
The results of our robustness checks are as follows:
Our results for funding costs, capital adequacy as measured by total  bank holding company equity as a percentage of assets, asset quality,  earnings, and liquidity as measured by long-term liabilities as a  percentage of total liabilities are generally robust to restricting the set  of bank holding companies we analyze to those with assets of $25  billion to $75 billion, but our results for capital adequacy as measured  by tangible common equity as a percentage of assets and liquidity as  measured by liquid assets as a percentage of short-term liabilities are  not.
Our results are generally robust to restricting the set of bank holding  companies we analyze to those with assets of $1 billion to $100  billion.
Our results are generally robust to starting the treatment in the third  quarter of 2009, 1 year before the passage of the Dodd-Frank Act.  This finding is consistent with the idea that bank holding companies  began to change their behavior in anticipation of the act’s  requirements, perhaps as information about the content of the act  became available and the likelihood of its passage increased.  However, there may be other explanations, including anticipation of  Basel III requirements, reactions to stress tests, and market pressures  to improve capital adequacy and liquidity.
Our results for funding costs, capital adequacy, and liquidity are  generally robust to allowing the treatment effect to vary by quarter  (see table 16). However, our results for asset quality and earnings  suggest that the Dodd-Frank Act may not be associated with  improvements in asset quality and earnings in every quarter.
section_title: Appendix VII: Dodd-Frank Act Rules Implementing Central Clearing, Capital, and Margin Swap Reforms
paragraphs: The following table lists select rules that implement sections of Title VII of  the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) related to central clearing requirements for swaps and  security-based swaps, and margin and capital requirements for swaps  entities, as of July 22, 2015.
section_title: Appendix VIII: Comments from the National Credit Union Administration
section_title: Appendix IX: GAO Contact and Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Stefanie Jonkman (Assistant  Director), Akiko Ohnuma (Analyst-in-Charge), Bethany Benitez, Pamela  Davidson, Courtney LaFountain, Marc Molino, Barbara Roesmann, and  Weifei Zheng made key contributions to this report.