The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama in 2010 in the aftermath of the financial crisis of 2008. The act, which has many provisions described over 2,300 pages, was drafted with the stated goal of promoting stability in the U.S. financial system. It was intended to be executed over a span of several years. Due to recent changes, that implementation timeline may be changing.
This spring, Congress passed and President Trump signed into law major reforms, titled the “Economic Growth, Regulatory Relief, and Consumer Protection Act”, which include scaling back on some of the original law’s major initiatives. For example, banks with assets between $10 billion and $250 billion will no longer be subject to mandated annual stress testing, whether it be for the Dodd-Frank Act Stress Test (DFAST) or the Comprehensive Capital Analysis and Review (CCAR), due to the passage of the regulatory relief bill.
Tim McPeak, an executive risk management consultant at the Sageworks Advisory Group, said many financial institutions may truly consider the changes to represent relief. “This mandated stress testing regime has been complex, time-consuming and expensive,” he said. “It is likely that most banks view this reform as an overall positive change, particularly at the $10 billion to $50 billion in assets end of the size spectrum. Institutions in this space are often really still community banks — or a collection of community banks rolled up via M&A, so the requirements have been more burdensome at this level due to the lack of resources and the complexity of the exercise.”
Although the reform may have some positive implications, a question stills remains about what expectations regulators will have for institutions around capital planning and overall risk management now that standardized testing is going away. According to McPeak, some form of stressed scenario analysis seems likely as part of these processes.
Another potential positive for financial institutions could be that many have had numerous resources tied up in their stress testing processes. Those resources have included people with the quantitative talent to understand the institutions’ underlying data and to build credit risk models around it, McPeak said. These skills and talent are likely able to transition easily enough within the institution to focus on the current expected credit loss model, or CECL, implementation as it requires many of these same analytical skills.
Even if those folks decide not the remain with their existing employers, they will represent opportunities for others to bulk up on bench talent as CECL effective dates approach, McPeak said. “This type of talent is needed in the market beyond just the banks,” he said. “The audit firms, regulators and vendors like Abrigo all need people with these skills.”