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Policy Watch: Preventing Crises and Protecting Pocketbooks

The 114th Congress began work on January 3, 2015. Implementing Dodd–Frank, reforming Fannie Mae and Freddie Mac, and studying what banks are doing to keep financial data safe are all still on the docket.

Not everything is new in the new year. As Congress moves from its 113th to its 114th session, many policy issues that were top of mind in 2014 will continue to be priorities in 2015. Here are some of the top financial services issues that will stay on the plate of lawmakers in the new year.*

Too big to fail

How best to prevent another financial crisis remains a priority. As we saw during the 2008 crisis, the size of some financial institutions, coupled with their interconnectedness with various aspects of the economy, can put the country’s financial stability at risk should the institutions not be able to meet their obligations. This type of failure not only compromises the broader economy, but it also raises concerns about taxpayers having to foot the bill when failing banks call on the federal government for loans to keep them afloat.

In an effort to prevent a crisis similar to the one from which many are still reeling, Congress passed in 2010 an expansion of regulatory authorities through the Dodd-Frank Act. The complexity of the act means, in part, that regulators are still in the process of writing and implementing rules the act set forth. Through January 2014, 73 percent of the rulemaking needed under Dodd–Frank has been completed, with another 16 percent in progress.

Legislators, however, continue to express concern over the length of time it has taken to implement the law and look to the legislative process to protect taxpayers from another bailout. Multiple bills on the issue were introduced in the 113th Congress, including two by legislators from the region the Cleveland Fed serves (which includes Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky). S. 798, introduced by Sens. Sherrod Brown (D-OH) and David Vitter (R-LA), would set an 8 percent equity capital to consolidated assets standard for banks with more than $50 billion in assets. An additional 15 percent capital surcharge would be required of banks with more than $500 billion in assets. Rep. Marcy Kaptur (D-Toledo, Cleveland) has already introduced the Return to Prudent Act, which bans affiliations between an “insured depository institution” and investment banks or securities firms.

At the same time, there is bipartisan interest in making sure that the increased scrutiny placed on “too big to fail” institutions does not hamstring smaller banks that do not have complex relationships or the compliance capacity of larger banks. (Indeed, in order to ensure that the implementation of Dodd-Frank does not put undue burden on community banks, banking agencies such as the Federal Reserve are taking a tiered approach, tailoring oversight based on an institution’s complexity and the level of risk it poses to the overall financial system.) Debate on how to handle this issue continues on the national level, though it is important in the Fourth District (the region served by the Cleveland Fed). Here, the majority of the banks supervised by the Cleveland Fed are small, community banks, defined as those with assets of $10 billion or less. While some Congress members favor a simple asset level standard, others propose a tiered approach based on the size, business model, and risk profile of the institution. Identifying the best way to protect community banks from the costs of regulation intended for systemically important institutions will be on the agenda for Congress’ committees on banking and financial services in 2015.

GSE reform

Also stemming from the most recent financial crisis is a push to dismantle Fannie Mae and Freddie Mac, the government-sponsored enterprises created to increase the availability of mortgage credit for middle-income Americans. Most members of Congress support some type of reform, but debate over what shape the reform would take fueled many conversations in 2014, and will continue to do so in the new year. For example, some members would like to see the work of the housing finance agencies turned over to the private sector, with Fannie and Freddie eventually being eliminated. Others believe there is still a need for government involvement in housing finance, especially as it relates to lower-income, moderate-income, and first-time borrowers. The House Financial Services Committee’s first hearing of the 114th Congress focused on housing finance and featured Federal Housing Finance Agency Director Mel Watt.

This past spring, Senate Banking Committee leadership proposed a compromise bill that wound down Fannie and Freddie over five years. It also established a new regulator called the Federal Mortgage Insurance Corporation that would function much like the Federal Deposit Insurance Corporation for the mortgage finance markets. While it did pass through committee, it lacked enough support for Senate leadership to feel confident in bringing it to a vote of the full Senate. Chairs of both the House Financial Services Committee and the Senate Committee on Banking, Housing and Urban Affairs are on record saying they want to see Fannie and Freddie close shop.

Cybersecurity

2014 was the year that the cybersecurity of individual Americans and corporations came to a head, with well-known companies such as Target, JP Morgan, and the US Postal Service reporting major hacking incidents. Concerned about the consequences of such a breach at a major financial institution, Rep. Elijah Cummings (D-Baltimore) and Sen. Elizabeth Warren (D-MA) wrote to 16 large financial institutions in November with questions about their cybersecurity protections. Among the information asked for in the letter was how many data breaches they have had in the past year, how many people were affected, and what measures have been taken to protect customers’ data.

Given the level of interconnectedness between banks and the rest of the economy, legislators are taking a closer look at what banks are doing to keep their and their customers’ financial data safe. This issue will be of growing concern for the Federal Reserve System as it is a key player in ensuring the financial stability of the country. It has already begun training bank examiners on how to assess banks’ data security protocols.

*Information is as of January 30, 2015.

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