WASHINGTON Federal Reserve Board Chairman Ben Bernanke said Wednesday that regulators are making steady progress on a number of critical rules under the Dodd-Frank Act, predicting that several final rules will be released in the coming months.
"It's an ongoing process, but I expect to see a more rapid completion going forward over the next few quarters," Bernanke told reporters at a press conference following a two-day Federal Open Market Committee meeting.
The.Fed chairman acknowledged that the process of implementing the regulatory reform law has "taken time." But he pointed to several reasons including the inherent complexity of many of the provisions, like the so-called Volcker Rule, and the difficulty of having to write rules jointly often with five agencies at a time that must "coordinate, cooperate and agree on language."
Nearly three years since the Dodd-Frank Act was signed into law on July 21, regulators have yet to implement several key provisions, including the Volcker ban on proprietary trading, the definition of qualified residential mortgages and final Basel III capital and liquidity rules. In many cases, Congress required the three banking agencies to jointly issue a rule while it mandated as many as six regulators to reach agreement for other provisions, such as the Volcker Rule.
Regulators have repeatedly expressed frustration with the pace of reaching consensus and coordinating with multiple agencies under the rulemaking process.
"Joint rulemaking just takes a lot of time, and for many of the rules, that process involves three to five independent agencies representing between 12 and 22 individuals who have votes at those agencies," said Fed Gov. Daniel Tarullo at a Feb. 14 hearing before the Senate Banking Committee. "Also, some of the rules involve subjects that are complicated, controversial, or both."
On Wednesday, Bernanke tried to highlight the progress made since the regulatory reform law has gone into effect, saying "it's a little unfair" to suggest that regulators have only completed some 30% of the rules.
For example, the Fed chairman said regulators were "very close" to completing the Basel III package of capital and liquidity rules, and also had "made a good bit of progress" on the "Volcker Rule," as well as "additional progress" on enhanced prudential regulations known as Sec. 165 and 166 under Dodd-Frank.
"Most of the rules, even if they haven't been completed, are now very far in advance," said Bernanke. "These are all things that will be coming relatively soon at least during the current year."
His comments endorsed a forecast made earlier this year by Tarullo, who is in charge of bank supervision at the central bank, when he suggested that many of the outstanding rules, including the prudential regulations for the largest, most complex banks would come later this year.
"I hope that 2013 will be the beginning of the end of the major portion of rulemakings implementing Dodd-Frank in strengthening capital rules," Tarullo said at the February Senate Banking Committee hearing. "So it's my hope and my expectation that with respect to the Volcker Rule, the capital rules, Section 716, and many of the special credential requirements for systemically important firms, we will publish final rules this year."
Bernanke was frank in saying that regulators have had a great deal of leg work to complete before they could release final rules.
"We really have to do our homework. We have to get these [rules] right," said Bernanke, who cited the often lengthy process that comes with writing rules in soliciting, reviewing and responding to numerous comments at a time.
Those rules include a package of requirements that will specify how the Fed plans to regulates the largest U.S. banks and what additional capital and liquidity those firms will need to hold. The rule, which was proposed in December 2011, has not been finalized.
At the time, Fed officials deferred moving ahead with certain requirements, like new liquidity rules, as they awaited greater consensus internationally on the requirement. Since then global regulators along with the U.S. have agreed to ease an earlier proposal released two year earlier that had been criticized for being too stringent.
The U.S. central banks also left several questions open such as whether it would institute a surcharge for institutions on other banks above $50 billion of assets, but who were not already considered globally systemically important banks. Under international regulations, eight U.S. institutions will at least face a capital surcharge of between 1% to 2.5%.
Another reason for the delay was caused in part by the Fed taking an additional year to figure out how it would revise how it regulated the roughly 100 foreign banks operating in the U.S. as required under Dodd-Frank. Those banks would also have to face the same set of capital and liquidity requirements as bank holding companies with $50 billion of assets.
Separately, the Volcker Rule, named after former Fed Chairman Paul Volcker, which is designed to stop banks from engaging in proprietary trading, has stalled, as regulators have had to sort out "hedging" and "market-making activities."
Additionally, regulators temporarily postponed moving ahead with QRM, which calls for securitizers to hold a portion of the risk, until a "qualified mortgage" rule had been put into place. The QM rule was finalized in January.