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The Missed Opportunities of Dodd-Frank

Today, the five-year anniversary of the seizure of Fannie Mae and Freddie Mac, seems like a good time to assess the Dodd-Frank Act. I was shocked when the government took over the government-sponsored enterprises, and it was just the beginning of a four-month period in which the unimaginable kept happening.

While largely a fan of Dodd-Frank, I think the law is full of missed opportunities, and the biggest one has to be the chance to rationalize our scrambled regulatory structure.

As Dodd-Frank was being written in 2009, few figured that we'd still be waiting on a half-dozen agencies in the fall of 2013 to write its implementing rules. Congress should have been bolder than simply melding the Office of Thrift Supervision into the Office of the Comptroller of the Currency. It should have created a single federal agency for supervision of financial services.

(To see more posts from Barb Rehm's Blog, click here.)

It's true this combined agency would have fewer checks and balances, but it also would have two huge advantages - it could move more quickly and it could be held directly accountable.

Here are other reflections on the 2010 law:

Dodd-Frank's dumbest provision: Setting the asset threshold for systemically important banks at $50 billion.

It's a huge distraction for the regulators to devise rules and procedures for policing a giant like JPMorgan Chase and then having to retrofit them for a plain vanilla bank like Zions.

Banks like Zions do not pose a systemic risk. Period. Forcing it to undergo a sophisticated stress test and meet all kinds of macro-prudential standards is just a gigantic waste of resources.

Most damaging provision: Permanently raising deposit insurance coverage to $250,000 per person per institution. That's more deposit insurance than the average person needs and it undercuts any incentive to ensure the bank you select is well-managed and well-capitalized. We need more market discipline of all kinds, including from retail depositors.

Most misunderstood provisions: Dodd-Frank's attempt to eliminate "too big to fail." Many critics say it failed to end bailouts, but they're wrong. Under the law, no single institution can be bailed out by the government.

Critics confuse the question of rescuing a single institution versus the financial system. If Armageddon happens, the government is going to step in. And it should.

Identifying systemically important institutions is just facing reality. They are too big to fail. But they aren't too big to be taken over by the government. That's key. No one in government wants to bail out another banking company. The FDIC is working hard to come up with a way to take over one of these giants and unwind it, split it up, spin it off whatever it takes to put the company out of business as it is.

So there's a distinction in the TBTF debate that too few are recognizing: if one or two big firms get into trouble, they will be seized and liquidated. But if the whole system is threatened, the government will and should step in.

Most disappointing provision: This is a tough call but for me it's the Office of Financial Research. Maybe the folks there are doing great things, but if so, they are keeping it darn quiet.

Former Treasury Secretary Tim Geithner never made OFR a priority and not much seems to have changed under his successor, Jack Lew. Dodd-Frank envisioned OFR would become a research and data powerhouse, helping to inform regulators of the risks bubbling up in the financial system and how various firms were connected to each other.

The office only got a leader, Richard Berner, early this year. (For some perspective on that, remember Dodd-Frank was signed into law in July 2010.) Its committee of outside advisors met for only the second time early this summer.

Congress should have separated OFR from the Treasury Department and given it the budget necessary to spot the next crisis as it developed.

Most intriguing unfulfilled provision: Why don't we have a vice chairman of banking policy at the Federal Reserve? Dodd-Frank created the spot and everyone figured Fed Gov. Dan Tarullo would get it, but the White House never nominated him. Debating why not has become a Washington parlor game. Tarullo doesn't want it; the White House doesn't want Tarullo. No one knows. It may not matter, but it does make you wonder what the real story is.

What's your take on Dodd-Frank? What provision will we come to regret the most? What's the sleeper provision? Which provision will impact bank operations the most? Leave a comment below.


(8) Comments



Comments (8)
If the Volcker Rule is not the soul of government planning and heavy handed government direction of private investment, then nothing is.
Posted by WayneAbernathy | Wednesday, September 11 2013 at 1:02PM ET
The WSJ reports "Assets at the 10 largest U.S. banks have grown nearly 40%, to $11 trillion, raising questions of whether the government has solved the problem of certain financial institutions being "too big to fail.""

It is not doing what Dodd Frank is suppose to do. FACT: Fannie and Freddie still exist EXACTLY LIKE THEY WERE 5 YEARS AGO. FACT: Loan growth for community bank can be expected to be in the subzeros. FACT: The heart of DF is the Volker Rule which is only 40% complete (WSJ 09/11/13).

If like central planners, you are in heaven now. Otherwise this is hell for the rest of us.
Posted by FreemenFreemarkets | Wednesday, September 11 2013 at 12:11PM ET
The biggest missed opportunity was ending interstate branching, and ending federal regulation of banks, S&Ls, etc. The Federal regulators are too easy to co-opt.

Contrast that with the insurance industry, regulated be the states. Aside from financial/mortgage insurers, the industry avoided the crisis.

More here:
Posted by djmerkel | Monday, September 09 2013 at 3:58PM ET
Diane has really hit the nail on the head. The crisis was the result of a housing finance bubble, and Fannie and Freddie were at the core of all that. It will be a lot harder to do GSE reform this year and next than it would have been in 2010.

I do want to offer kudos for pointing out the problem of defining systemically significant banks by one measure--size--while non-banks are subject to a whole matrix of factors. A true matrix of genuine indicators of systemic risk should apply in all cases. And, back to the original point, Fannie and Freddie would have met all such tests, and were completely ignored by Dodd-Frank.
Posted by WayneAbernathy | Friday, September 06 2013 at 3:48PM ET
With the exception of defining systemically important at the number pulled from the air of $50 billion, Dodd Frank did not address the cause of the crisis or the culprits. As you started with Happy Anniversary on the Fannie/Freddie conservatorship--where is the plan or legislation to address that? Dodd Frank didn't even try. Instead we have a law that burdens thousands of banks that did nothing wrong with more regulations--and more to come. And those that caused the crisis go on as usual. And Fannie and Freddie are left in purgatory.
Posted by Diane Casey-Landry | Friday, September 06 2013 at 2:42PM ET
The first point tells it all. If public policy motivated this bill, they would have consolidated all regulators and political oversight to promote accountability. They generally did more of the same, more counterproductive regulation and political rent-seeking.
Posted by kvillani | Friday, September 06 2013 at 2:11PM ET
I hear you Lawrence, but you're really arguing that Dodd-Frank should have broken the giants up. But it didn't and we have to deal with the reality that we have systemically important institutions. What Dodd-Frank did was ensure that if one of them fails, it will no longer be propped up as we've done in the past. If a crisis strikes, and a number of companies face a liquidity crunch, then the government stepping in to rescue the system makes sense. Barb Rehm
Posted by brehm | Friday, September 06 2013 at 12:59PM ET
Barb, I agree with most of your assessments. The $50 billion threshold, for example, is an obvious violation of Goodhart's Law.

But confusing "the question of rescuing a single institution versus the financial system"? Fiddle faddle: this is the heart of the entire TBTF debate and drawing such a distinction merely begs the question--should any institution ever be permitted to become so large/interconnected, etc., etc., that its failure would threaten the whole financial system? I know the answers are by no means clear but the question is not avoided by restating it as self evident distinction.
Posted by Lawrence Baxter | Friday, September 06 2013 at 10:58AM ET
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