Title I expands federal research, evaluation, and oversight of large financial institutions in order to find efficient ways to manage risks to the financial stability of the United States. The Title establishes two new government departments, the Financial Stability Oversight Council (FSOC), and the Office of Financial Research, an office within the Treasury. Title I also expands the authority of the Board of Governors of the Federal Reserve System to allow for supervision of certain nonbank financial companies and large bank holding companies that could have a substantial impact on the United States economy, but that were not under the purview of the Board of Governors in the past.
This Title was adopted in order to identify, evaluate, and manage the risks to the financial stability of the United States from domestic and foreign financial institutions. The Office of financial Research operates as an office within the U.S. Treasury, and is focused mainly on long and short-term research of financial stability. This information is used by the Financial Stability Oversight Council, along with the FSOC’s own information collection, to identify risks to financial stability, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system. Finally, the Title provides supervision and regulation for certain large bank holding companies or nonbank financial institutions that could potentially have a major impact on the U.S. financial system if they were ever to default or fail.
The establishment of new departments and offices to research and monitor will likely lead to stronger supervision of large companies. Prior to the Dodd-Frank Act, regulations and government supervision tended to fall on a smaller group of financial institutions. This left a group of nonbank financial companies and some smaller bank holding companies outside of government supervision, despite their potential to impact the financial stability of the United States. Additionally, by broadening the enforcement and examination authority of the Board of Governors, this same supervision will be extended to this previously unsupervised group of financial companies.
Subtitle A – Financial Stability Oversight Committee
Subtitle A of Title I establishes a new regulatory body, the Financial Stability Oversight Council (FSOC), which will be funded out of the Office of Financial Research in the U.S. Treasury. See 12 U.S.C. § 5321 (Dodd-Frank Act §§111, 118). The FSOC has the authority to collect information from various federal regulation agencies, monitor the financial market, and analyze this information to identify gaps in regulation and make recommendations on heightened standards for risk-management. See 12 U.S.C. § 5322 (Dodd-Frank Act § 112).
Evaluation of Nonbank Financial Companies
The FSOC has the authority to evaluate and identify nonbank financial companies that will be under heightened supervision by the FSOC and the Board of Governors of the Federal Reserve System (Board of Governors). See 12 U.S.C. § 5323(Dodd-Frank Act § 113). In determining what regulatory agencies will supervise companies, the FSOC may resolve disputes between two member agencies that claim supervisory jurisdiction of a particular company or institution. See 12 U.S.C. § 5329 (Dodd-Frank Act § 119). Banks that were in financial distress and received financial assistance through the Troubled Asset Relief Program (TARP) are automatically under this heightened scrutiny. See 12 U.S.C. § 5327 (Dodd-Frank Act § 117).
In evaluating a nonbank financial company, the FSOC will consider various factors that might contribute to the company’s risk of impacting financial stability, including leverage, off-balance-sheet expenses, transactions and relationships with other financial companies, the impact of the company as a creditor of households and other companies, assets and liabilities, current regulation and supervision, and the company’s financial activities. See Dodd-Frank Act§ 117. Any companies that the FSOC chooses to supervise must register with the Board of Governors and comply with more stringent supervision and regulatory standards. See 12 U.S.C. § 5325 (Dodd-Frank Act §§ 114, 115).
Enforcement of Risk Mitigating Standards
The regulatory standards recommended by the FSOC to the Board of Governors are designed to target company operations that create systemic risk in the financial system. For example, the FSOC can recommend standards to limit contingent capital, credit exposure, and a company’s short-term debt, which are all potential sources of risk for a company’s financial stability. See 12 U.S.C. § 5325 (Dodd-Frank Act § 115). The FSOC can also set broader public disclosure requirements so that investors and customers are fully informed of the risks they bear when dealing with that financial company. See id. Finally, the FSOC can require a company to develop a resolution plan that explains how a company would conduct a rapid and orderly resolution in case of financial distress or failure. See id.
The FSOC can also actively intervene in company operations to mitigate risks to financial stability. If a large bank holding company appears to pose a grave threat to financial stability, the FSOC has the authority to limit the bank’s products, operations, and affiliations with other companies, and can even require that the bank terminate certain activities, or transfer or sell its assets. See 12 U.S.C. § 5363 (Dodd-Frank Act § 121).
Subtitle B – Office of Financial Research
Title I establishes a new office within the Department of the Treasury, the Office of Financial Research (OFR). See 12 U.S.C. § 5342 (Dodd-Frank Act § 152). The OFR collects and standardizes data, conducts applied and long-term research, and develops new tools to measure and monitor risk. See 12 U.S.C. § 5343 (Dodd-Frank Act § 153). This information is then shared with FSOC, member agencies, the Bureau of Economic Analysis, and other financial regulatory bodies. See id. Because the OFR is an entirely new office, Title I provides that it will receive funding from a specially created fund in the Treasury called the Financial Research Fund. See 12 U.S.C. § 5345 (Dodd-Frank Act § 155). Additionally, there will be a period and process of orderly transition in order to begin operations in the OFR. See 12 U.S.C. § 5346 (Dodd-Frank Act § 156).
The OFR is divided into the Data Center, which is responsible for data collection and the Research and Analysis Center, which focuses on developing computing and analyzing resources for monitoring, researching, and evaluating risk and financial conditions. See 12 U.S.C. § 5344 (Dodd-Frank Act § 154).
Subtitle C – Additional Board of Governors Authority for Certain Nonbank Financial Companies and Bank Holding Companies
Supervisory and Enforcement Authority
Subtitle C of Title I expands the authority of the Board of Governors of the Federal Reserve System (Board of Governors) over nonbank financial companies and large bank holding companies that FSOC has determined to be under heightened supervision. See 12 U.S.C. § 5361 (Dodd-Frank Act § 161). Under these new supervisory powers, supervised financial companies must report certain information to the Board of Governors, including any large acquisitions of other financial companies. See id. (Dodd-Frank Act § 163). The Board of Governors is also responsible for establishing tests to determine whether to automatically exempt certain types of foreign or domestic nonbank financial companies from supervision. See 12 U.S.C. § 5370 (Dodd-Frank Act § 170).
The Board of Governors has the authority to impose more stringent supervisory standards on those covered financial companies. See 12 U.S.C. § 5365 (Dodd-Frank Act § 165). These regulations are tied to the same risk factors considered by the Federal Stability Oversight Council (FSOC), including liquidity requirements, risk management processes, resolution plan reports, credit exposure reports, and limits on risk concentration. See id. The Board of Governors can also impose new requirements for a company’s leverage and risk-based capital investments ratios to control potential risks in the company’s financial structure. See 12 U.S.C. § 5371 (Dodd-Frank Act § 171). In general, these standards should be developed with the goal of addressing the risks that certain activities or operations pose to the institution, as well as public and private stakeholders, in the event of disruption or failure of the institution. See id.
The Board of Governors may also establish procedures that will minimize risk or impact if a bank becomes insolvent. For a supervised company that might have a major impact on the financial system if it were to fail, the Board of Governors may dictate early remediation actions that can help prevent or lessen those impacts. See 12 U.S.C. § 5366 (Dodd-Frank Act § 166). Additionally, the Board of Governors can closely scrutinize and monitor the financial activities of a supervised company by requiring the company to house its financial operations in a newly created intermediate holding company. See 12 U.S.C. § 5367 (Dodd-Frank Act § 167). This allows the Board of Governors to supervise the financial operations together, and to exercise enforcement powers over the holding company without having to enforce financial regulations over the entirety of the parent company. See id.
Limits on Newly Expanded Authority
The examination and enforcement duties of the Board of Governors are limited by a few provisions. First, the Title emphasizes the need to avoid duplicative regulation and information collection, seeking to ensure that the Board of Governors operates efficiently and does not impose unnecessary compliance costs on the companies. See 12 U.S.C. § 5369, 12 U.S.C. § 1820(Dodd-Frank Act §§ 169, 172). Additionally, Title I provides for the Board of Governors and the FSOC to conduct a number of studies to better inform regulations in the future in order to keep regulations efficient and effective. See Dodd-Frank Act§ 174. Finally, as a general rule of construction, Title I preserves the regulatory power of other regulatory agencies by stating that no regulation shall be construed as to lessen the stringency of other regulations, or to undermine or eliminate the authority of a regulatory agency under any other law. See 12 U.S.C. § 5374 (Dodd-Frank Act § 176).
Foreign Financial Companies
Title I has a number of provisions that address foreign nonbank financial companies that operate in the U.S. The same evaluation process applies to foreign nonbank financial companies when the Board of Governors and the FSOC determine whether to hold those foreign companies to heightened supervision. See 12 U.S.C. § 5323 (Dodd-Frank Act §113). Subtitle C gives the Board of Governors the power to restrict foreign financial companies from access to the U.S. if the foreign company cannot demonstrate that its country is making progress toward adopting a satisfactory system of financial risk mitigation and regulation. See 12 U.S.C. § 1305 (Dodd-Frank Act § 173). To help further this enforcement, the President, FSOC, Board of Governor, and Secretary of the Treasury are responsible for coordination with foreign countries about international policy on financial regulation. See 12 U.S.C. § 5373 (Dodd-Frank Act § 175).
For companies that now fall under the supervisory authority of the FSOC, Office of Financial Research, and Board of Governors, new standards will be implemented and enforced regarding information reporting, and their general financial operations. In October of 2011, the FSOC provided corporations with more guidance as to which financial companies and institutions fall under this additional supervision, and which financial companies would be exempted. Additionally, the Board of Governors, as part of its expanded enforcement authority, has begun to promulgate specific standards on establishing resolution plans and risk committees, which will apply to all supervised companies.