The Great Recession of 2007-2009 – the largest economic downturn since the Great depression – rocked the global economy and left millions of people in financial ruin. While several factors contributed, the 2008 burst of the US housing bubble and the consequential mortgage crisis were the main catalysts of the recession. Numerous financial regulations were developed after the crisis with the goal of preventing history from repeating itself.
As these regulations were rolled out, financial institutions had to scramble to implement major organizational changes. 14 years later, many of these regulations are still causing headaches for multiple teams throughout banks. Let’s look at a few:
1. Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act is known as one of the most restrictive and controversial reforms that resulted from the financial crisis. It was rolled out in 2010, was made up of 848 pages, and targeted banks, mortgage lenders, and credit rating agencies. Eight years after its passing, the Trump administration spearheaded a rollback of the Act, passing the Economic Growth, Regulatory Relief, and Consumer Protection Act.
Even with the rollback, compliance with the Dodd-Frank act still requires a significant effort from financial institutions, with one example being the stress test. Certain national banks and federal savings associations are required to conduct these tests on an annual or bi-annual basis and submit the results to the OCC.
Prior to 2008, money market funds (MMFs) were considered to be safe investments. However, when the Reserve Fund fell below $1 per share, the actual “safety” of MMFs came into question. To prevent the broad collapse of MMFs, the Securities and Exchange Commission (SEC) created Rule 2a-7, requiring MMFs to restrict holdings to investments that have more conservative maturities and credit ratings.
Money market funds are now required to conduct their own due diligence on their investments and document it annually. Funds today are still struggling to find the capacity to keep up with these reporting requirements.
3. SR 11-7
In 2011, the Federal Reserve and the Office of the Comptroller issued Supervisory Letter SR 11-7, still widely used today as the base of MRM frameworks. While this was initially targeted at large banks and insurers deemed “too big to fail”, in 2017, the Federal Deposit Insurance Commission (FDIC) extending its applicability to all institutions with over $1 Billion in total assets.
Just last year, the Office of the Comptroller released a handbook on model risk management to provide further details around the standards set forth by SR 11-7. Today, risk departments are still feeling the impact of this ever-increasing scrutiny as their model risk management teams are struggling to keep up with their workloads.
4. Basel III
Basel III was created in 2009 by a syndicate of central banks across 28 countries, introducing a set of reforms around banks’ leverage ratios and levels of reserve capital. Implementation is still in process today, with the most recent implementation date being set to January 1, 2023.
Like the other regulations above, Basel III was developed to mitigate risk through improved supervision of the banking sector. However, as is true for the other regulations, it places a burden on banks to execute on the reforms and keep up with reporting requirements. More than a decade later banks are still dealing with Basel III implementation.
5. MiFID II
The Markets in Financial Instruments Directive II (MiFID II) went into effect in 2018 after the 2008 financial crisis exposed weaknesses in the provisions of the original MiFID, which went into effect in 2007. MiFID II increases transparency by imposing more reporting requirements and tests.
When MiFID II was rolled out in 2018, it had a global impact on how the buy-side consumed sell-side research. Even today, firms continue to navigate the terms of MiFID, with large events such as Brexit creating new complications with complying.
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