One year ago this month, President Obama signed the landmark Wall Street Reform and Consumer Protection Act, also called the Dodd-Frank Act, into law. In reflecting on this important milestone, we should remember why we needed to act to restore the public’s trust in our financial system and what has happened since the bill became law.
Years of excess, greed, financial shenanigans and weak regulation of some sectors resulted in a severe financial crisis that took our economy to the edge of a cliff and resulted in a deep recession that began in late 2007. The U.S. economy runs on credit, but credit began to contract in ways not seen since the Great Depression.
What caused these problems? The answer is many things. Investment houses and global banks had taken on excessive risks and became overleveraged. Managers of financial institutions made short-term decisions based on their bonuses and compensation. In search of greater profits, unscrupulous lenders gave subprime mortgages to families who could not afford the houses.
Aided and abetted by credit rating agencies, mortgage-backed securities underwriters used complex structures and unregulated derivatives to turn bad assets into fool’s gold. Some of these problematic securities ended up on the books of corporate credit unions, which eventually caused a crisis in the credit union system.
In September 2008, Lehman Brothers crumbled, and AIG teetered on collapse. Because commercial paper seized up, employers struggled to pay workers on time. Job losses soared, and people stopped buying cars.
Credit unions were deeply affected by the financial crisis. The corporate credit union failures and resolution, which will cost the system billions of dollars, grew directly out of the financial crisis. The severe recession resulted in elevated delinquencies and charge-offs, weak loan growth and compressed earnings.
Americans were justifiably scared. They had lost confidence in the integrity of our financial system. We needed to do something.
So the Obama administration and Congress began work on a bill to restore trust in our financial markets and safeguard the jobs, homes, savings and dreams of all Americans. This bill ultimately became the Dodd-Frank Act.
During the past year, Dodd-Frank has begun to achieve its desired results of promoting a safer financial system. Big banks, for example, have begun to operate a bit more like credit unions. They now hold more capital and underwrite safer loans. This additional capital provides a buffer against risk that will protect our economy against future downturns.
A new watchdog dedicated to safeguarding consumer financial security officially opened its doors last week. The Consumer Financial Protection Bureau consolidates the regulatory authority previously spread across many agencies and will oversee the activities of big banks, payday lenders and debt collectors.
Importantly, the bureau will have clear accountability for policing financial products like credit cards and mortgages. The agency has already begun work on easy-to-understand disclosures for homebuyers. If they had been in place before 2008, these know-before-you-owe standards might have protected millions of families from foreclosure.
During the last year, the NCUA has focused on completing the many credit union reforms required by Dodd-Frank. The NCUA has also taken its seat as one of 10 voting members of the new Financial Stability Oversight Council.
The NCUA’s role within the council ensures that credit unions have a voice as we act together in an unprecedented
manner with other regulators to identify and address threats to the global financial system. The council is now working to name the systemically important institutions that will need to follow stricter standards, which will result in a safer, stronger financial system.
Of course, challenges remain and the NCUA has more work ahead, both to implement Dodd-Frank and to create a more stable, secure credit union system. Just as the Stability Council works to address systemic threats of the entire financial system, the NCUA will continue its efforts to safeguard the credit union system with tailored, comprehensive rules to mitigate risk. The NCUA’s pending regulation on interest rate risk and forthcoming proposal on limiting the riskiest investments in a credit union’s portfolio are two examples that build on the work started last year.
Without question, the country has come a long way since the financial markets entered a free fall in late 2008. As we start the second year under DFA, we are building a stronger, safer financial system. The performance of credit unions has turned a corner, and our financial system has changed in far-reaching ways since the crisis.
The Dodd-Frank Act is working to improve regulation and create a process to identify emerging risks and mitigate problems in the financial system so that businesses can secure the capital needed to innovate, the economy can grow and create jobs, and families can confidently save and invest for the future. This economic stability and expansion will help all Americans, including credit unions, to continue to flourish in the years ahead.
Debbie Matz is NCUA board chairman. CONTACT (703) 518-6330 or email@example.com