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The War Over Financial Reform Needs to End

It's time to call a truce.

Industry critics are not villains and bankers are not heroes. Let's try that sentence again, this time with the nouns flipped: Bankers are not villains and critics are not heroes.

It's time for everyone involved in the debate over financial reform to consider the greater good. Our economy needs a well-functioning financial system. That's not a pro-industry platitude. It's a fact.

"We have to move away from trying to put someone in prison," says Lawrence Baxter, a law professor at Duke University. "I know I sound like an apologist for the banking industry but I don't see how we do anything constructive if we don't move away from that attitude."

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

Baxter urges "a workable system that is not punitive and is actually mutually beneficial."

How unfortunate that this idea sounds novel. But Baxter is right. We have to get over being mad at the industry, or the government, or whoever you're mad at, and work together to craft a better future for finance.

I'm not talking about letting banks skate. I'm talking about ensuring our financial system benefits the economy. That it helps create jobs. That it's still able to take reasonable risks. That it finances dreams and helps investors hedge risks. That is provides a safe place for savers, and even a decent return on that money.

This is my last story for American Banker. My first was in April 1987 and in those intervening 26-plus years, I've written several thousand stories about financial services public policy. I'd like to thank everyone who has helped me along the way.

By definition, news is largely negative. For my final column, I'd like to consider a positive path toward the "workable" system Baxter recommends.

To start, we need to assess how much reform is enough.

Obviously where you sit affects your answer. But let's look at the progress we've made since 2008. Far too often and I, too, am guilty of this we complain about how long improvements take or how delayed this or that favored reform is in coming.

But there is no denying the system is safer and sounder than it was in 2007.

Bank capital is at record levels. There is both more of it and it's of a higher quality than before the crisis. Regulators know more about bank capital planning and strategy than ever. Examiners are exercising authority over everything from stock repurchases to dividend payments. The bigger the bank, the tighter the capital squeeze.

The story is similar for liquidity, and supervision has been super-sized. The largest banks undergo regular stress-testing and are being prodded out of business lines that the government considers too risky, particularly capital markets.

While much progress has been made, more is around the corner.

Soon the Federal Reserve Board will finalize an array of tougher prudential regulations called for in Dodd-Frank, and regulators are hard at work on two more rules one to limit wholesale funding and another to beef up a holding company's ability to absorb losses.

All this is leading our largest banks to simplify their operations and get out of ancillary businesses. Considering their string of missteps, anything that makes the giants easier to manage is welcome.

But remember, prices tend to rise as the number of players in a market declines. The higher compliance costs that accompany tighter oversight will also drive up prices. These consequences must be considered as we move forward.

The overarching question is whether all this will be enough. Should we go further and break up the biggest banks or put a protective ring around units that accept insured deposits?

Possibly, but I think it makes sense to take a breather and assess the impact of all these changes before embarking on structural reform.

For instance, let's see how the mortgage market reacts to new underwriting rules, to the Fed's tapering and to the higher fees being charged by Fannie Mae and Freddie Mac. And let's see what the Volcker Rule's ban on proprietary trading does to competition and markets.

Pausing is not a sign of weakness; it's common sense.

But we need to use the pause wisely. Let's dial back the complaints and the accusations and try trusting each other again. It may not be comfortable but all sides in this need one another.

It's counterproductive for folks like JPMorgan general counsel Stephen Cutler to publicly complain about the cost of enforcement actions, or for Better Markets CEO Dennis Kelleher to call JPM a "one-bank crime spree."

And here I'd urge more intra-industry unity as well. All banks, regardless of size, benefit when the industry does well. The flipside is true. Beating up on the big banks doesn't do community bankers any good.

Perhaps all this boils down to a detailed plea to "play nice." But let's face it, aren't we all better off when we do?

Finally, in the spirit of optimism, I'm going to predict both the Financial Stability Oversight Council and the Office of Financial Research will surprise us in 2014. I've doled out my fair share of criticism of both because these Dodd-Frank creations have yet to live up to their promise.

But in his first year as Treasury Secretary, it's clear Jack Lew wants to see Dodd-Frank succeed; he isn't afraid to use his FSOC chairmanship to coax peace from warring agencies. Exhibit A is the finally finished Volcker Rule.

I see Lew as a thoughtful steward of the financial markets who will ensure reforms don't overwhelm the industry. Remember economic recovery is important to the administration, too.

OFR chief Dick Berner also is showing some encouraging signs. His office is finally gaining traction, highlighting gaps in data collection that we ought to fill if we want to head off another crisis.

The financial system needs leadership. It needs policymakers willing to reconsider reforms when unintended consequences pile up. It needs bankers willing to cooperate with them to reach the law's goals.

Let's agree that not everything in Dodd-Frank will work and nothing in it will end finance.


(9) Comments



Comments (9)
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Posted by billisaac | Friday, December 27 2013 at 7:32AM ET
First, Barb, congratulations on a wonderful career at the American Banker. I have always enjoyed reading your thoughtful columns.

I grant you that banking system is safer than in 2007, at least for the time being until we forget the lessons of the past. But I hope the debate on the Dodd-Frank financial reform legislation is just beginning, not ending.

Dodd-Frank was not needed to increase bank capital and liquidity requirements, implement serious stress testing protocols, or limit bank trading activities. All that was required was for requlators to have the political will to do their jobs.

Let's focus for a moment on what Dodd-Frank didn't do: 1) Dodd-Frank didn't reform an unwieldy and ineffective regulatory system and in fact made it more complex and inefficient; 2) Dodd-Frank didn't reform Fannie and Freddie whose lack of proper underwriting standards led directly to the housing crisis; 3) Dodd-Frank did not address the highly pro-cyclical accounting rules created by a Financial Accounting Standards Board (accountable to no one) -- rules that contributed greatly to the intensity of the financial crisis and the slowest recovery in modern history; 4) Dodd-Frank didn't address deeply flawed risk-based capital rules that assign risk weightings of zero to soveign debt and 25% to securitized mortgages; and 5) Dodd-Frank did not address the pervasive use of expensive and volatile brokered deposits, which represent a massive abuse of the deposit insurance system.

On the other hand: 1) Dodd-Frank (specifically the Durbin amendment) transferred tens of billions of dollars of fee income annually from banks to retailers like Target, making it more difficult and risky for banks to earn decent profits; 2) Dodd-Frank will produce from 10,000 to 20,000 pages of new regulations micro-managing the industry, which will no doubt drive thousands of community banks from the business, further increase concentration in banking, and reduce lending to small busineses; and 3) Dodd-Frank is pushing a good deal of lending and other financial activity out of regulated banks and into the shadow financial system where we can't even see it, much less regulate the activity.

Dodd-Frank is anything but thoughtful and meaningful reform legislation. It is a political document enacted by Congress to atone for passing the TARP legislation.

I hope we never lose our will to fight for more intelligent reforms -- reforms that actually focus on the causes of the crisis of 2008-2009 and the two other major financial crises in my professional lifetime (1972-1974 and 1980-1992).

Best wishes in your future endeavors, Barb. I will miss your provocative columns.

Bill Isaac, former FDIC Chairman
Posted by billisaac | Friday, December 27 2013 at 7:29AM ET
High quality capital is absolutely not at record levels. Most banks have serious issues in collecting, aggregating, and reporting data which would be of any use to regulators or the market. Much remains to be done in the are of serious bank and financial reform.
Posted by Mayra Rodriguez Valladares, MRV Associates | Friday, December 20 2013 at 3:16PM ET
We'll miss your column. I agree that Banks and regulators are wiser and better prepared for the future. However, I can see nothing helpful that has come from legislation and examiner overreach except less credit availability.
Robert Hulsey
Posted by rbthul | Friday, December 20 2013 at 12:06PM ET
Posted by stonecastle | Friday, December 20 2013 at 11:41AM ET
Well stated Barb. And here's to our first 27 years of robust bank insights....
Posted by Steve Bartlett | Friday, December 20 2013 at 9:29AM ET
Perhaps it is fitting that Barb's last column for the American Banker is in the Friday Digital Edition. That serves to illustrate how much has changed since 1987 in both publishing and banking. Congratulations on a great career and an outstanding message for all involved in and around the American banking industry Just like Ted Williams, you have hit a home run in your final at bat.
Art Johnson
Posted by artwork | Friday, December 20 2013 at 9:13AM ET
Perhaps it is fitting that Barb's last column for the American Banker is in the Friday Digital Edition. That serves to illustrate how much has changed since 1987 in both publishing and banking. Congratulations on a great career and an outstanding message for all involved in and around the American banking industry Just like Ted Williams, you have hit a home run in your final at bat.
Art Johnson
Posted by artwork | Friday, December 20 2013 at 9:13AM ET
Great way to end 27 years of reporting. Your candid insights will be missed and the Banker won't be the same without you. All the best!
Posted by Diane Casey-Landry | Thursday, December 19 2013 at 3:39PM ET
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