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Now for the Hard Part: The Top Five Challenges of Reg Reform

WASHINGTON — President Obama's signing of regulatory reform legislation Wednesday signaled the official end of a hard-fought legislative battle but just the beginning of the tougher task of implementing the new law.

By some estimates, federal regulators must complete 243 rules, largely during the next two years, along with 67 one-time reports or studies and 22 periodic reports.

Beyond a daunting breadth of new rules to write, regulators must flesh out the details of a host of highly complex requirements in the law with little or no guidance from Congress.

"The amount of work that the regulators are going to have to undertake under this legislation is nothing short of breathtaking," said Charles Horn, a partner at Mayer Brown specializing in financial services regulation. "It isn't just a question of the sheer number of studies, regulatory implementation requirements and things like that they have to comply with, but it is also the fact that the legislation in so many areas is, frankly, deliberately vague and does not really create a lot of substantive, quantitative support. … This is going to be close to an unprecedented challenge for the regulatory bodies in general."

Far from settling long-standing disputes over controversial issues, observers said, the law will ultimately spark new ones.

"There is just a ton of work to be done on the implementation side," said Anthony Plath, an associate professor of finance at Belk College of Business of the University of North Carolina, Charlotte. "The bureaucratic infighting and turf wars and political battles that are going to go on is just going to be a nightmare."

Some tasks will be more difficult than others. In interviews with former regulators, academics, analysts and banking lawyers, general agreement emerged on the toughest challenges: creating a council to detect systemic risks, crafting capital and liquidity standards, building a consumer financial protection bureau, enforcing a ban on proprietary trading and setting standards for derivatives.

Financial Stability
With the president's signature on the bill, the Financial Stability Oversight Council — comprising 15 members, 10 with voting rights — is now officially established and given the general task of identifying emerging threats and heading them off.

Creating the council is the easy part, but making it functional is likely to be a Herculean task.

Headed by the Treasury secretary, the council includes the heads of eight other agencies with oversight of the financial sector and an additional person designated by the president as an expert on insurance regulation.

The council must meet within 90 days and at least every quarter thereafter. Most of its actions will require a simple majority to authorize, but some special decisions, including whether to break up a financial company, would require a two-thirds majority, including the Treasury secretary.

Many observers said the agencies will bring with them competing, sometimes conflicting, agendas that may make finding consensus on major issues close to impossible.

"Ensuring cooperation among 15 members, including nine federal agencies — each with its own institutional culture, methodologies, outlook and priorities — will require an expansive framework of new procedures and protocols, and a tremendous amount of effort and good faith among regulatory colleagues," said John Dearie, the executive vice president of the Financial Services Forum.

Then there is the question of whether the council can even accomplish its mission. Many questioned what criteria regulators will use to define a systemic threat and to identify institutions that pose a risk to the economy. The statute directs the council to consider assets, leverage, size, liabilities and interconnectedness, but it will be up to the council to figure out how to quantify such factors. "It's so complicated because there is no answer," said Mark Zandi, the chief economist and co-founder of Moody's Economy.com. "No one really knows. First of all, how do you define 'systemic risk,' then how do you measure it and then how do you respond to it? Conceptually, everyone's on board, it's just the practicality of actually addressing it, is incredibly difficult."

The law does offer some clues. As of Wednesday, any bank holding company with at least $50 billion of assets is automatically deemed systemically significant and will be subject to heightened prudential standards to be designed and adopted by the Federal Reserve Board. Meanwhile, the council may also identify nonbanks as systemically significant, but it has more latitude on which ones it designates. Figuring out which nonbanks should be considered systemically risky will be tough, however, observers said.

"I don't think anybody has a clue," said Ernest Patrikis, a lawyer at White & Case LLP.

Capital And Leverage
Though the law would require the Fed to impose tougher risk-based capital and leverage requirements, it is unspecific about how this should be done.

Only one thing is clear: The central bank must act quickly. Since the law explicitly says that all systemically important banks are subject to the to-be-written regulations, some said the Fed must put something in place fast.

"That is going to be a major priority," said Richard Spillenkothen, a former director of banking supervision at the Fed, who is now a director in Deloitte & Touche LLP's regulatory and capital markets consulting practice.