Get Set for '1,500 More Tiny Cuts' Courtesy of Dodd-Frank

It was impossible this week not to feel the same dread and helplessness that plagued the fall of 2008 as bank stocks slid into terrifying territory and spreads on credit-default swaps jumped.

In part that's because three years after the financial meltdown, very few of the rules governing finance have changed despite last summer's enactment of the Dodd-Frank Act.

"Dodd-Frank seems to be having a tough time getting out of first gear," said Richard Hunt, president of the Consumer Bankers Association.

If there is a silver lining in this week's volatility it may be a renewed sense of urgency among policymakers.

"Regulators are human beings," said Rich Spillenkothen, former head of supervision at the Federal Reserve Board. "When the aroma of crisis is in the air, it can't help but affect your approach."

So it seems like a good time to ask what single rule, still to come from the regulators, will have the most impact on Dodd-Frank's effectiveness.

Sources had lots of candidates, including how tough the Commodity Futures Trading Commission goes on derivatives, how the Consumer Financial Protection Bureau defines an "abusive" product and how tightly the Fed interprets the Volcker Rule's limits on proprietary trading.

But the overwhelming pick was a rule the Fed is writing to implement Section 165 of Dodd-Frank.

"There are plenty [of rules] that might go on the list," former Comptroller of the Currency John Dugan said in an interview this week, "but in terms of the one that we really haven't seen that is going to have the broadest impact, it's 165."

The law requires the Fed to write rules that hold systemically important companies — both banks and nonbanks — to standards that are "more stringent" than those applied to other financial firms. These "enhanced prudential" standards will cover everything from risk-based capital rules and a leverage ratio to liquidity requirements and concentration limits. They will dictate risk management practices, resolution plans and credit exposure reports.

That's just for starters. The law also gives the Fed the option of imposing standards on any of these topics: contingent capital; enhanced public disclosures; short-term debt limits; and any other factors the central bank "determines are appropriate."

The statutory deadline for these rules is Jan. 1, 2012, so the Fed has less than five months to propose, collect comments and adopt a final rule. Fed officials have said little about the proposal other than noting it will be released before summer's end.

The rule is rumored to run 1,500 pages, and most sources expect the central bank to fully flex its authority.

"It's 1,500 more tiny cuts when we are already bleeding," is how an executive at one megabank described the coming plan.

Greg Wilson, a policymaker during the first Bush administration who did a stint at McKinsey & Co. before becoming an independent consultant and author, said the Fed likely will want to prove to Congress that it is taking the mandate seriously.

"I am concerned they will take a maximalist approach so they can say to the policymakers, 'Hey, we were tough. We did what you told us to do. Here are the heightened new standards, here is the risk matrix for how they increase in stringency based on risk profiles,' " Wilson said.

But once the government, as Dodd-Frank also mandates, flags the nonbanks it considers systemically significant, then the 165 rules will hold all financial players to the same standards.