Just as implementation of the sweeping Dodd-Frank Act of 2010 is getting under way, President Obama and House Speaker Boehner have put a stake in the ground on the importance of sensible, not excessive, governmental regulation for the 21st century.
Their timing is auspicious, because bipartisan cooperation on this matter is urgently needed. Excessive regulation robs America of an innovative and vibrant economy and accordingly, as the President rightly points out, deprives Americans of job opportunities. In order for much-needed financial regulatory reform to be successful, we must tilt toward regulation that promotes a safe and sound financial system but lean away from regulation that hinders growth and competition. It is a difficult and delicate, but not impossible, balancing act.
In our technologically driven and fast-paced world, even well-crafted rules can quickly become obsolete. In the complex area of regulation, the vigor and thoughtfulness with which efforts are made to minimize burden and waste will prove every bit as important as the wise policy direction itself.
Make no mistake, the regulatory morass is enormous, complex and genuinely costly. Taken together, globally coordinated regulations such as Basel capital standards and myriad national regulations are expected to dampen GDP across the U.S., the euro zone and Japan by a cumulative 3.1% through 2015, according to the Institute of International Finance. Consider also that the President's 2012 budget proposal would add $6.5 billion and 5,000 people to the government for implementation of Dodd-Frank, which requires the enactment of some 300 new rules. More than 60 of these rules require joint implementation among several regulators. Unless great care is taken, these rules are likely to be mind-numbingly complex. And importantly, in recent years, the lack of accountability and vested authority among the respective financial regulators was a key contributor to the crisis. So as regulators sort through the new Dodd-Frank rules, establishing clear lines of accountability and authority must be a top priority.
As comptroller of the currency from 1993 to 1998, I saw firsthand how regulation can both benefit and strain our financial system. Every new regulatory requirement and responsibility takes time away from the management of companies — time that could otherwise be used to make the firm more productive, innovative, competitive and safe. Rules and regulations must hit close to the center of the target in the most effective and efficient way possible. Where superfluous, they should be eliminated.
Too many rules and regulations divert company energies from thoughtful efforts at risk control, let alone growth and innovation, so the net effect often falls short of what the lawmakers intended to achieve. For example, excessive bank leverage capital ratios can actually encourage riskier behavior, as financial services firms need to earn a higher rate of return to justify the high flat capital charge.
Regulators, with the support of Congress, should take these steps immediately to help regulatory reform succeed:
- Stop overburdening the banking sector while under-regulating other financial providers — such as mortgage brokers — simply because they have a different charter. Doing so has the unfortunate effect of driving business out of the regulated sectors of finance and into the shadows, as we have already learned, at great cost.
- Review every new regulation within two years of implementation to determine if it is fulfilling the goal that it was intended to accomplish in the most efficient and cost-effective fashion. Special emphasis should be placed on weeding out duplication of regulatory rules and eliminating needless overlap in regulators' responsibilities.
- Take particular care in promulgating and reviewing rules to ensure that there is some real basis in fact that undergirds their efficacy. Too many laws, rules and regulations arise from prejudice, not science. Other rules constrain by reason of antiquated definitions. Putting science behind regulation will further speed the recovery of our financial system.
Government regulation of the financial system is needed and should be enforced. The financial services area is a testament to what can go wrong when the right balance is not struck. We have good, capable people running our regulatory agencies. We must create rules that empower these dedicated people to use their energies most productively. But, the right balance must be achieved to maximize regulatory effectiveness.
Creating a balanced and sensible regulatory framework for America in the 21st century will pay big dividends. A failure to take this challenge seriously will drag America down. When it comes to regulation, more is not better. Only better is better, and better demands balance.
