As Dodd-Frank turns 3, it remains a work in progress

Three years ago Sunday, when President Obama signed into law a sweeping bill to overhaul financial regulation, he offered a simple but poignant observation.

“For these new rules to be effective, regulators will have to be vigilant,” he said, standing before 400 supporters at the Ronald Reagan Building.

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Progress of the Dodd-Frank financial overhaul law, three years later.
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Progress of the Dodd-Frank financial overhaul law, three years later.

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The moment marked the beginning of what has proven to be a slow and arduous process of trying to implement one of the most ambitious pieces of legislation in decades — the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Given the severity of the financial crisis, there was great expectation that regulators would move swiftly to enact and enforce the landmark legislation. But the same intense lobbying and political wrangling that took place when the bill was being written has continued to hold up or water down some of its provisions.

Federal watchdogs were tasked with writing 398 rules to flesh out the law, but they have missed 62 percent of the deadlines set by Congress, according to data from Davis Polk & Wardwell, a law firm that represents financial institutions.

Lately, there has been a renewed commitment from the administration to accelerate the process. Treasury Secretary Jack Lew told an audience of investors in New York on Wednesday that “by the end of this year, the core elements of the Dodd-Frank Act will be substantially in place.”

A top priority, he said, is to complete the long-delayed Volcker Rule, a controversial provision that would ban federally insured banks from proprietary trading — using their own capital to make trades. The practice has produced huge profits for financial firms but also has been blamed for huge losses during the crisis.

“Volcker was a good idea in principle, but the implementation has been dreadful,” said Simon Johnson, an economist and professor at the MIT Sloan School of Management. “It may make some contribution but will no doubt continue to draw a lot of pushback and gaming by the industry.”

Industry lobbyists have said the Volcker Rule limits some safe forms of trading and will severely affect profit at some of the nation’s largest banks. JPMorgan Chase’s $5.8 billion trading loss last year made Congress question whether a functioning Volcker Rule could have prevented the blunder. Yet there was not enough momentum to complete the rule.

The past 60 days have been one of the most active periods for implementing Dodd-Frank. Banking regulators approved a proposal July 9 that would force big banks to hold far larger cash buffers than required by international standards.

Meanwhile, the Commodity Futures Trading Commission has pushed forward rules to reduce risk and increase transparency in the vast market for derivatives — the complex financial instruments that helped fuel the crisis.

But the commission has made some compromises that worry reform advocates. It agreed, for instance, to allow the overseas affiliates of American banks to defer to the derivative rules of foreign countries as long as those rules are comparable. Critics say the move will encourage banks to conduct their business in places where regulators are lenient.

“There are a number of weaknesses in the derivatives rules, but it is a big step forward from what was basically a regulatory black hole before the crisis,” said Marcus Stanley, policy director at Americans for Financial Reform, a watchdog group.

Another important step in executing Dodd-Frank took place last week, when the Financial Stability Oversight Council designated GE Capital and American International Group as systemically important.

The move ushered in a new era of oversight for firms that play in the financial markets but have largely escaped federal supervision. Life insurers, hedge funds and private-equity firms now can be regulated by the Federal Reserve. It is still unclear, however, exactly what the Fed will require of the firms.

At the New York conference, Lew attributed the recent activity to a shift in the way stakeholders now view financial reform. Some of the “alarmist thinking” about Dodd-Frank has faded, he said, and a consensus has emerged that “a coherent framework of rules will provide needed certainty.”

What has also emerged is sentiment that the 848-page law failed to end “too big to fail,” the perception that some big firms will always be bailed out by the government. Myriad bills from unlikely pairs, including Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), have been introduced to force mega-banks to hold more money in reserves or to simply break up.

There may be little chance of Sens. Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) reinstating Glass-Steagall — the Depression-era law that prevented commercial banks from using customer deposits to trade securities. But their effort seems to be placing pressure on regulators.

“If we get to the end of this year and we cannot, with an honest, straight face, say that we have ended too big to fail, we are going to have to look at other options,” Lew said.

Officials at the Treasury declined to discuss exactly what those “other options” would be.

Industry groups insist that regulators must finish putting Dodd-Frank in place before piling on more regulation that could destabilize the fragile economic recovery.

Some of the congressional proposals “can undermine the innovative capacity and competitiveness of our financial system,” said Rob Nichols of the Financial Services Forum, a trade group representing the largest banks.

He said industry and regulatory initiatives have already gone a long way to improve the safety, stability and security of the nation’s financial system.

There is one provision that many proponents of financial reform point to as a clear success: the Consumer Financial Protection Bureau. Americans now have an independent consumer bureau to protect them from mortgage, credit-card and other lending abuses that ran rampant before and during the crisis. It did, however, take two years to confirm the agency’s director.

 
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