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Dodd Frank 2 Year Anniversary Report July 2012

Dodd Frank 2 Year Anniversary Report July 2012

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Published by: The Partnership for a Secure Financial Future on Jul 18, 2012
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State of the Financial Services Industry
July 17, 2012
Focus on fortress balance sheets; too big to fail;the cumulative weight of new rules; and economic benefits of big banks
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State of the Financial Services Industry
The two-year anniversary of the Dodd-Frank Act is marked by a safer and strongerfinancial services industry. Capital is at a record high, lending is at pre-crisis levels, and
the number of “problem banks”
is rapidly decreasing. The risk profiles of individualfirms have been reduced and systemic risk oversight is in place for the first time inhistory. These dramatic improvements are the result of industry initiative and financialregulatory reform.However, financial services companies (and the economy) have yet to face some of themost expensive costs coming from the Dodd-Frank Act. Nearly 70% of the rules haveyet to be finalized. Many of the expected provisions carry significant economicconsequences for the industry, consumers, and the economy.
At this critical time in our nation’s economic recovery, we must preserve those parts of 
the Dodd-Frank Act that make our system safer and stronger, while re-examining theprovisions and combination of provisions that needlessly restrict economic growth,limit credit, result in higher costs and reduced access to services for consumers, andmake U.S. companies less competitive.
Fortress Balance Sheets
Banks are much stronger today than they were
even before the 2008 crisis.
According tothe Hamilton Financial Index released on July 16, 2012, bank safety and soundness is22% above pre-crisis levels.Bank capital is the highest in history. FDIC-insured banks hold $1.6 trillion in capitaland set a record Tier 1 capital ratio (13.28%) in the first quarter of 2012. Insurance
firms’ capital and surplus
have also grown to all-time highs, despite an increase innatural disasters in 2011.Lending has risen to pre-crisis levels. Large banks with over $10 billion in assetsincreased their loans by $40 billion during the first quarter of 2012, and loan qualityhas improved across all loan categories and all bank sizes.Net income has returned to pre-crisis levels. FDIC-insured commercial banks andsavings institutions reported $35.3 billion in net income for first quarter 2012. Thisrepresents a $6.6 billion (22.9%) improvement over first quarter 2011 results.B
ank failures are at their lowest level in three years, and the number of “problem”
institutions is now at its lowest level since 2008.The improved health of the financial services industry is widely recognized. Accordingto Federal Reserve Chairman Ben Bernanke,
“Risk indicators present a picture of the
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banking system that has become healthier and
more resilient.” Presidential
candidateMitt Romney echoed this sentiment, recently saying,
“Our banks are on a much stronger
basis than they were at the time of the last economic crisis, and they have built their
capital base and their equity base and worked through a lot of their toxic assets.”
Systemic Risk & Too Big to Fail
The risk and impact of a financial services institution failing has been significantlyreduced through industry improvements and financial regulatory reform.Supervision of large financial services companies has increased dramatically. Forexample, large banks must submit detailed plans and stress tests to the Federal Reserveon an annual basis before they can pay out dividends to shareholders or make any othercapital distributions. Additionally, the Dodd-Frank Act mandates that large banksconduct three stress tests each year and publicly disclose information about the results.Systemic oversight is in place for the first time in history. The Financial StabilityOversight Council was created to monitor risk across the entire system, and identifyand head-off emerging trends that could be a threat to financial stability.In the unlikely event that a large financial company actually fails, the FDIC now hasliquidation authority to swiftly isolate and resolve the firm. Large financial servicescompanies must plan for their own failure and submit extensive resolution plans to theFDIC and Federal Reserve each year with an overview of how their institution would beresolved.While there is no single definition of 
too big to fail,
it is commonly used to describe afinancial institution whose failure would destabilize the economy and thus requiregovernment intervention using taxpayer funds to keep it afloat. The improved healthof financial institutions, increase in systemic risk oversight, and statutory protection of taxpayer dollars means that too big to fail is no longer a problem.
Cumulative Weight of Reform
According to Davis Polk’s
Dodd-Frank progress report, 279 of 398 rules (70%) requiredby the Dodd-Frank Act 
have yet to be finalized 
as of July 2, 2012.Many of these rules will dramatically alter the ways financial services firms do business,and the cumulative weight of hundreds of new rules promises to be significant for theU.S. economy. Consider these findings from recent studies:
As the result of regulatory reform, U.S GDP is projected to be 2.7% lower than it would otherwise be by 2015, lending rates are projected to be 4.7% higher, and

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