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Dodd-Frank Law at 1: a Progress Report

President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010; Getty Images file photo

Depending on your opinion, the Dodd-Frank financial reform law which President Obama signed last year, has been characterized as one of the following:

  • the most significant and sweeping overhaul of Wall Street and big banks since the Great Depression
  • a deeply intrusive law that would stifle business and investment and make the U.S. less competitive
  • a worthy idea that would help alleviate some systemic risks to the economy but was largely a missed opportunity that allows the biggest institutions to continue with risky gambles and huge profits

A year later, the debate continues and the efforts to shape how those rules are set remain very much an ongoing issue in Washington and New York. The Sunlight Foundation has established a website where you can find which lobbyists are meeting with which regulators on the specific provisions they’re trying to influence.

Hundreds of pages long and encompassing several major government agencies, the law certainly has large goals. Exceedingly simplified here, they include:

  • reducing or ending the risk of so-called “too big to fail” companies by creating an orderly dissolution plan
  • requiring banks and other institutions to keep more capital on hand to avoid bailouts (remember AIG? Citigroup?)
  • bringing risky “shadow banking” out of the darkness by requiring risky bets like some derivatives to be traded in open exchanges
  • creating a consumer-protection agency to guard consumers against sketchy lending practices while regulating mortgages and credit cards with clearer disclosure.

That said, the Dodd-Frank Act is a long way from done. Its timelines for implementation of different regulations varies considerably. Of the more than 400 new rules (such as curbing banks’ ability to trade on their own behalf), more than half have future deadlines. Nearly as many deadlines have not yet been met as those that have. And the five biggest banks remain incredibly large with assets approaching $9 trillion, according to The Huffington Post.

Given the ambitions of the financial reform law, we asked a variety of experts to weigh in on the first anniversary of Dodd-Frank to assess how effective it is at protecting the American economy from another crisis, what shortcomings are becoming apparent and whether banks are already trying to get around the law.

The edited and condensed views here include that of a tough former government regulator, a trade group representing some of the largest banks and financial firms in the world, a consumer coalition and two noted economists and writers. See their bios at the end of the entry.

How well is the Dodd-Frank Act protecting the financial system from ‘too big to fail’ banks and firms? What progress do you see?

Marcus Stanley, Americans for Financial Reform: Dodd-Frank doesn’t break up the largest banks, which are today even larger than they were prior to the financial crisis. But it contains some important reforms which could lessen the unfair advantage they have and the risk they pose to taxpayers and the economy. One of these is the requirement that banks raise more of their own capital and borrow less money, compared to both their levels of borrowing before the crisis and what is required of their smaller competitors. Holding more risk capital ensures that big banks can lose their own money without turning to the rest of us for a bailout. The law also puts new restrictions on short-term bank borrowing and credit-risk exposures by major banks, as well as restricting the kinds of murky and unregulated off balance sheet transactions that helped lead to the crisis.

Many big banks have also spun off their proprietary trading desks in anticipation of new Volcker Rule requirements, which forbid Wall Street banks from doing risky trades on their own account. But the jury is still out on whether it will be tough enough to really stop banks from risky proprietary trading, as regulators are being fiercely lobbied to include numerous exemptions and carve-outs.

There are other areas where regulators need to move faster, including designating big non-bank financial institutions for enhanced supervision. After a year, regulators haven’t designated even the largest and most obvious big institutions for oversight – and they’re facing heavy pressure from industry against making such designations.

Sheila Bair, former FDIC Chair: There has been some good progress, particularly on too big to fail. The FDIC finalized rules changing the way we assess for deposit insurance so that larger institutions with high-risk funding structures will pay more in premiums than banks which rely on stable, core deposits. We also finalized rules laying out the processing of claims if a large non-bank entity fails and is resolved under the new liquidation procedures contained in Title II of the Dodd-Frank Act. These make clear to shareholders and creditors that they will absorb the losses if a financial institution they have invested in becomes nonviable.

We also approved rules allowing the FDIC to claw back up to two years’ worth of compensation from board members and executives who are substantially responsible for the failure. The FDIC and the Federal Reserve Board are close to finalizing rules which will require large, systemic financial firms to develop credible plans which demonstrate that they can be broken up and resolved in an orderly way in a bankruptcy process. If they cannot make such a showing, the Federal Reserve Board and FDIC may jointly order them to make structural changes or even divest of certain operations.

The banking regulators have also finalized a rule to insure that capital requirements applicable to large, systemic financial entities are at least as high as those applicable to smaller banks. This will prevent big U.S. banks and their holding companies from taking on excess leverage.

I’m disappointed that we haven’t done more to reform the securitization market. Many of the derivatives reforms face an uphill battle. We’ve achieved good international agreements to substantially raise capital requirements for large, systemic banks, but now they need to be implemented through regulations.


Steve Bartlett, Financial Services Roundtable: Too big to fail is essentially off the table. Dodd-Frank does effectively provide that, in the unlikely event a large institution does fail, it would be liquidated in an orderly manner and the costs distributed by remaining systemic institutions.

Further, higher capital standards, stress tests and greater scrutiny of underwriting and financial activities make failure far less likely.

Systemic risk regulation is provided for in Dodd-Frank, but it has not yet been effectively implemented. The Financial Stability Oversight Council has been created, but is not yet functioning across agencies. Nevertheless, regulatory oversight over all regulated banks, especially the large ones, is more robust now than ever before.

Institutions have strengthened their risk management practices: eliminating riskier activities, using salary deferrals and clawbacks to focus employees on the long-term horizon.


Simon Johnson, former IMF chief economist and author of ’13 Bankers’: Dodd-Frank put some powerful tools in the hands of regulators. The FDIC, working with the Federal Reserve, can force big banks to become smaller and simpler. They can also break up the banks with a view to creating alternative providers of key financial services so that markets will not be disrupted if a single firm of any size fails.

The legislation also put more “resolution powers” in the hands of the FDIC, along with the Fed and the Treasury. In principle, this means that when big banks get into trouble, they can be wound down in an orderly manner, which would include losses for creditors imposed in a fashion that does not cause a broader panic.

But will the FDIC and others be able to use these powers? On this point, the jury is still out.

Tyler Cowen, GMU economist and ‘Marginal Revolution’ blog author: There has been a clarification of resolution authority, which is a good thing if another crisis were to come along. In theory that could benefit us now, if it were needed.

My ideal system of bank regulation involves leverage restrictions, capital requirements and otherwise not a whole lot of micromanagement. Dodd-Frank in contrast is based on a lot of micromanagement. I think it unlikely that such micromanagement will succeed. Lower leverage makes the system more robust to both a lot of private-sector and regulatory failures. Runs on money market funds are an outstanding problem and that has not been addressed. That is my big worry right now with the euro crisis, since many money market funds have exposure to European banks.

Overall, the bill was a mish-mash in the first place and we’re not getting even that. It wasn’t well thought-out.

In terms of protecting against systemic risks from shadow banking, derivatives or requiring firms to hold more capital, how well is Dodd-Frank doing?


Sheila Bair: The industry tried to beat back higher capital requirements for systemic institutions but those efforts were, by and large, unsuccessful. I think it is important that the bank regulators move swiftly to write the rules implementing the new capital agreements. The longer they wait, the more opportunity for mischief by industry opponents.

The off-exchange derivatives markets pretty much remain the wild west. I think we should prioritize at least getting better trade and position reporting in the credit default swap market from all the major participants. The prospect of a default on Greek sovereign debt has renewed scrutiny of the credit default swap market. It is a good thing that Greece is a relatively small sovereign, because I don’t think the regulators have a good handle on who ultimately pays in the event of a default.

Market participants tell us the risk is dispersed, but then that is what they said about the credit default swap exposure related to subprime mortgages. The truth is, we don’t know if there is another AIG out there holding the bag.

Simon Johnson: On derivatives, there was an attempt to force more trading onto exchanges and to increase margin requirements. But there is an important exemption for so-called “end users.” These are supposed to be non-financial firms that are not in the derivatives trading business, but this loophole seems likely to cause trouble as financial firms have an incentive to disguise what they do.

The Financial Stability Oversight Council was created as an interagency forum to oversee everything pertaining to systemic risks. So far it has seemed ineffectual. The first FSOC report on risks is due out soon; expectations are not high.


Tyler Cowen: I favored the derivatives clearinghouse idea at first, but so far it has not gone well and the policy has simply created another “too big to fail” institution.

Many other parts of the act protect us against what I see as phantoms, such as proprietary trading. It didn’t cause the last crisis or even contribute to it. Could it cause a crisis someday? Maybe, but so could many other things.

A lot of the changes are still pending and thus many matters are hard to judge. They would be hard to judge even if the regulations were in place.

When it comes to protecting consumers from abuse and sketchy lending practices, how well is it succeeding?


Marcus Stanley: Some of the sketchiest subprime mortgage loans have temporarily disappeared from the market because people – including the market players who funded them – have not yet forgotten how much damage they did. Going forward, Dodd-Frank contains excellent rules to prevent any return of abusive mortgage-lending practices. Equally important, there is a dedicated new agency – the Consumer Financial Protection Bureau – to enforce them. That’s a huge step forward compared to the lack of enforcement of consumer protection rules we saw by the bank regulators in the past.

The CFPB actually “turns its lights on” on July 21, but the work of putting the bureau together has been going very well. However, the financial industry and their allies in Congress are mounting a last-ditch effort to try to hobble the bureau and tie its hands before it even gets started. Forty-four Senate Republicans have signed a letter saying they will not even consider a nominee to lead the new bureau unless the CFPB is weakened and subjected to interference by the same bank regulators who failed to protect the public in the past. Without a director, there is a lot the bureau can do, but it will not be able to assume its full authority over non-bank lenders and assure a level playing field across the financial market.

Steve Bartlett: First, it’s important to remember that most of the companies that were making bad loans and passing them on are simply out of business. Market discipline did most of that, but bad loans that cannot be repaid are no longer permitted. Indeed, subprime loans, per se, even if they can be repaid are no longer being made to any extent at all.

Credit card disclosures and overdraft fees have become far more transparent and consumer friendly. Part of that is in response new laws and regulations, but a large part is company driven, in response to consumer demand.

And at the Consumer Financial Protection Bureau (CFPB), the one step they have taken is a proposed long needed consolidation of mortgage disclosure. Creating a one-page, plain-language mortgage disclosure is a major victory for consumers and industry alike. Other organizational efforts at CFPB are still TBD.

Some in the financial industry say the rules are so burdensome that it could impinge on the ability to do necessary business. Your view?

Simon Johnson: There are many claims but no hard evidence to support the argument. Stock indices for smaller businesses are up compared with a year ago and there is no sign that it is harder to raise capital in public markets. The main problem business faces is weak domestic consumption demand – but this is due to the financial crisis and the effects of so many people being underwater on their mortgages (owing more than the house is worth).

Steve Bartlett: While much of Dodd-Frank is beneficial to safety and soundness, and less systemic risk, some of it will prove to be harmful to the American people as they need to finance their economic activities. The verdict is still out, but some concerns that are becoming apparent include: too much capital required can suffocate the economy. Already, before Dodd-Frank has been implemented, large banks have increased their capital by $300 billion or 70 percent. Some regulatory agencies are calling for a two-and-a-half times increase of minimum capital, from 4 percent to 14 percent. Some have estimated this would cost 4.6 million U.S. jobs, or 100 basis points in the cost of credit.

The cumulative weight of compliance costs of the Dodd-Frank Act appears to be staggering. Financial institutions should be regulated for safety and soundness, but “regulation for regulation’s sake” simply adds dead weight costs which are borne by consumers. When Ben Bernanke was asked if the cumulative costs of compliance was ever considered, he replied no.

Marcus Stanley: The financial industry has “cried wolf” before. During the Depression, bankers protested vehemently against the creation of the Securities and Exchange Commission, the FDIC and investor-protection laws, saying that they were “monstrous systems” imposing an “impossible degree of regulation” that would “cripple” the economy. Looking back, it’s obvious those claims were groundless. In fact, improving regulation made the financial system more stable and benefited everyone in the long run.

We saw this same behavior during the housing bubble, when financial interests used these arguments against attempts to curtail the abusive subprime loans that ended up being at the heart of the crisis. Their words – and their dollars – carried too much weight then, but we can’t allow them to have their way now. A poll this week showed that 77 percent of voters favor tougher rules and enforcement for Wall Street. That support went across party lines, with big majorities for tougher enforcement among both Republicans and Democrats. We need to regulate in the public’s interest, not the interest of the financial sector.


Sheila Bair is the former chair of the Federal Deposit Insurance Corp., which supervises and examines a number of banks and financial institutions. She stepped down earlier this month and is now with the Pew Charitable Trusts.

Steve Bartlett is president and CEO of the Financial Services Roundtable, a trade group that lobbies on behalf of many of the largest banks and financial institutions, including companies in trouble at the height of the crisis.

Marcus Stanley is policy director for Americans for Financial Reform, a coalition of dozens of consumer and political action groups.

Simon Johnson is a former chief economist for the International Monetary Fund. He is a professor at M.I.T. and author of “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.”

Tyler Cowen is a professor of economics at George Mason University and co-author of the popular blog, “Marginal Revolution.” His most recent book is “The Great Stagnation.”

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