The tipping point is coming. A critical mass of angst and dissatisfaction with the Dodd-Frank Act and Basel III is opening the door to change.
Industry executives should walk through it, extend a hand to policymakers and work collaboratively to improve the supervisory infrastructure governing their business.
If they don't, it will be a missed opportunity of enormous proportions.
How ripe is the moment? Even lawmakers who voted for the 2010 reform law are open to improving it.
"Congress never gets it right, when you're looking at massive reform legislation, the first time through," Sen. Mark Warner, D-Va., told The Hill newspaper last week. "You directionally head in an area and then you come back, two years, three years hence to do a corrections legislation."
And a flood of letters from Capitol Hill is forcing the regulatory agencies to rethink the latest Basel capital rule.
The November elections are another natural turning point, regardless who wins the presidency. It's a new beginning with opportunity to make some changes.
Ammunition for anyone seeking change arrived Monday from Karen Shaw Petrou of Federal Financial Analytics.
Petrou, the sharpest mind analyzing banking policy today — maybe ever — has just completed a comprehensive, three-part assessment of the regulatory landscape (the three parts: Strategic Regulatory Landscape, Operational Impediments to Effective Financial Regulation and Assessment of Resolution Regime for SIFIs). Her stark conclusion: even if regulators did everything called for in Dodd-Frank, and did it perfectly, financial services supervision would still be a mess. Throw Basel III in the mix and it just gets worse.
The end-result of numerous agencies pumping out massive rules to meet statutory deadlines will be a tangle of contradictory mandates that will be tough to enforce and impossible to comply with.
Petrou concludes the regulatory agencies should step back and take a wide-angle view of their work and ask: what's most important and how are those rules connected to each other?
"The regulators need to look across the landscape, pick the near-term priorities, finalize those with an eye towards how each relates to the others and then move on," she said in an interview.
"Regulators need to go back to Congress and say, 'We want to do everything you said all at once but we can't. Here are our priorities.' And on issues like the Volcker Rule, they need to say, "Tell us what to do.' "
Topping Petrou's priorities are the rules relating to Too Big to Fail.
"First and foremost we need to finalize a resolution regime that ends Too Big to Fail because that is the driving determinant of what type of regulatory system we should have," she said.
"If big banks are Too Big to Fail you need one set of rules. If they are not, then another set of rules is appropriate."
Petrou devotes one of her three reports solely to this question, and concludes the orderly liquidation authority in Dodd-Frank should prevent taxpayer bailouts of financial companies. She applauds the Federal Deposit Insurance Corp. for the progress it's made to date, but her report catalogs, in detail, all the issues that still must be nailed down.
