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Cover Story

The Dodd-Frank Effect

Barney Frank was running late.

Bankers, lawyers, regulators and press milled around the Washington Marriott, waiting for him to deliver the keynote address to an American Banker regulatory symposium.

After a 15-minute delay, the Massachusetts Democratic congressman arrived, looking only slightly disheveled as he stepped up to the podium and flew into his presentation.

Using neither notes nor a net, the co-author of the Dodd-Frank Wall Street Reform and Consumer Protection Act provided an emphatic defense of the landmark, 2,300-page bill, including a lengthy critique of efforts to neuter its 5 percent risk-retention rule for lenders.

But the real highlight of the morning came during the audience Q&A, when Frank put his signature bulldog tenacity on display after an old foe of ramped-up regulatory efforts took the mike: retired Office of Thrift Supervision Director John Reich.

Reich, whose former agency was itself retired this year when the OTS was folded into the Office of the Comptroller of the Currency, asked Frank what he thought of consolidation in the industry, the accumulative impact of regulations on small banks and the "pervasive feeling that Washington doesn't really care about the future of community banking, whether it's 7,000 banks in the country or ..."

"Can I ask you a question?" Frank interrupted. "Why do you think we increased the deposit limits to $250,000? Do you think we did that for Bank of America?

"Why did we change the basis on which deposit insurance is calculated to make it risk based," Frank continued, "so that the percentage paid by the largest banks went up and the percentage paid by the smaller banks went down?"

"Well," Reich answered, "those are two steps in the right direction ..."

"But do we think we did that out of indifference to the community banks?" Frank said, taking over the conversation again. "Let me put it this way: There may be differences about policy, but the motives you're impugning to us are simply not there."


Terry Pruden has been in banking for more than 40 years, from his days in the Chicago region to his time in Texas, where he's now vice chairman of The Bank of River Oaks in Houston. He's well accustomed to the FDIC exam process, but at the bank's most recent assessment, it was the first time he needed a third hand to count the number of people sent by the Federal Deposit Insurance Corp. "We had 12 to 13 examiners at our last exam," he says.

In the past, the $254 million-asset River Oaks normally drew only four or five examiners at a time. And the exam team was only that big because of the six-year-old bank's extended de novo status.

Pruden doesn't question the efficiency of the super-team process—he saw no redundant exercises or unnecessary checklists—but "we've always had good ratings throughout the history of the bank," Pruden says. With only two branches and 38 employees, "12 to 13 sounds like a lot to me."

Welcome to the new FDIC. With Dodd-Frank on the books and the troubled-bank list growing more than 25 percent since 2009, the primary regulator for 62 percent of the nation's banks is branching out with deeper exams—and knocking on new doors.

Since Dodd-Frank assigned the agency resolution responsibilities for institutions of systematic significance, the FDIC has been sending examiners into new areas, such as large-bank capital markets operations, or into institutions where other primary bank regulators already have set up shop.

"We never had an FDIC person on premises, but they want to be here now," says Bill Demchak, senior vice chairman at PNC Financial Services Group, which is primarily overseen by the Federal Reserve at the holding company level and by the OCC at the national bank level.

The day-to-day changes in compliance procedures, exams and even the risk-management methodology forged by major bank regulators already have had a profound impact. In addition to being visited by larger exam teams, bankers say that as a result of Dodd-Frank, they are being pressed further on Fair Lending compliance, and they complain that examiners are forcing them to classify too many salvageable loans.

What has many concerned is that despite all of the thorny issues that have arisen, this is just the first phase of a long-term regulatory makeover for which a plethora of rules is still on the drawing board.

In a Sept. 19 speech at the same conference in Washington where Frank and Reich had their exchange, FDIC Acting Chairman Martin J. Gruenberg noted that "economic inclusion and access to mainstream banking services" is one of the agency's major priorities, which echoes bankers' reports of a recent crackdown on compliance with Fair Lending rules.

In addition, with a surge of hires and transfers at the FDIC, the agency is assigning newcomers to ride sidesaddle into exams with experienced regulators to get a better understanding of what to look for and of the mechanics of a banker-regulator relationship.