IT HAS been almost half a decade since the passage of the Dodd-Frank overhaul of financial regulation; how’s it working so far? On the upside, commercial banks are significantly safer than they were prior to the 2008 financial panic, with an average of $13 in capital for every $100 in assets for member banks of the Federal Deposit Insurance Corp., according to a recent Wall Street Journal report. On the downside, new bank formation has ground to a halt and mortgages have become harder to get for applicants with less than perfect credit, according to a recent Urban Institute report. In other words, we have a system that’s less likely to blow up, in part because it’s less free to fund Americans’ dreams.
Good luck quantifying those benefits and costs with total objectivity. Meanwhile, interest groups that feel wronged by the new dispensation bombard Congress with their appeals — and lawmakers respond. Hence Richard C. Shelby (R-Ala.), chairman of the Senate Banking Committee, has introduced a bill to change Dodd-Frank; the panel will hold a drafting session Thursday. Having heard the cries of community and regional banks in their home states, Mr. Shelby and his Democratic colleagues agree that small players do not pose “systemic” risk and therefore deserve regulatory relief. Where they may not agree, however, is on the definition of “small.”
Mr. Shelby’s draft, unlike a streamlined counterproposal from ranking Democrat Sen. Sherrod Brown (Ohio), would extend help to some institutions that don’t meet the common-sense meaning of the word “small.” Specifically, it would end the automatic designation of the one-half of 1 percent of banks that have more than $50 billion in assets as “systemically important.” Such banks must pass stress tests of their capital under hypothetical crises and prepare “living wills” in anticipation of catastrophic failure. Instead, Mr. Shelby would give regulators discretion to make the systemically-important designation with respect to banks with $50 billion to $500 billion in assets, based on criteria such as a bank’s “interconnectedness, substitutability, cross-border activity, and complexity.” The process would include new layers of mandatory discussion between banks and regulators.
That sounds like a recipe for endless litigation, in which banks’ well-funded legal teams could outmaneuver, or simply outlast, regulators. The relative handful of regional banks affected say current rules force them to waste money on regulatory compliance that they could otherwise devote to growth-enhancing lending. Perhaps this is true — though, like the overall costs and benefits of Dodd-Frank, the claims are notoriously difficult to quantify. Federal Reserve Governor Daniel K. Tarullo has expressed sympathy for setting the cut-off higher than $50 billion. The important point is that, whether Dodd-Frank set the systemically-important bar too low or too high — at least it set one. There is value in a clear, bright-line rule. Whatever else they do, lawmakers should not blur it.