How the Battle to Change Dodd-Frank Has Shifted

WASHINGTON — This time last year, many observers predicted that 2013 might finally be the year that policymakers made technical corrections and other minor modifications to the Dodd-Frank Act.

Instead, such efforts were largely drowned out amidst larger discussions about "too big to fail" in the wake of JPMorgan's "London Whale" mess and a renewed push for housing finance reform in both the House and Senate. Partisan rancor in Congress also swelled to new heights amidst battles over stalled Senate confirmations, the budget and the debt ceiling, grinding legislative activity to a halt at several points over the year.

"We've been talking about technical corrections since the day Dodd-Frank passed. People said 2011 would be year of technical corrections," said Brian Gardner, an analyst with Keefe, Bruyette and Woods. "It just goes to the point of how difficult it is to pass anything through Congress right now."

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That's a trend that's likely to continue into next year, with few now predicting tangible progress on a major technical corrections bill this Congress, thanks to ongoing partisan dysfunction and an interest among top Democrats in keeping the law as it is.

"There should be a bill eventually, but it's not going to happen in the next 12 months," said one senior banking industry official.

That hasn't stopped House Republicans from continuing their push for changes to the law — both technical corrections and more substantive reforms designed to roll back certain provisions.

The Financial Services Committee advanced more than a dozen bills this year relating to the law's derivatives provisions and the Consumer Financial Protection Bureau, though there's little chance for final passage as long as Democrats control the Senate and the White House.

In some ways, the debate in Congress has already moved past Dodd-Frank, with critics on both sides of the political aisle warning that the law doesn't go far enough to protect the economy from systemically risky institutions.

"The debate has kind of been over whether 'too big to fail' exists or not, because that was supposed to be the number one mission of the law," said Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy. "The large banks are not about to say, do away with Dodd-Frank, because if you did have to come up with something new, the something new might actually break them up."

Indeed, instead of leading the charge for wholesale repeal or even significant reform of the Dodd-Frank law, the industry now seems to find itself aligned with the White House in arguing that regulators should be allowed to finish implementing the crisis-era law before additional changes are considered.

"There's been a notable lack of synergy between the banking sector and this administration, but on this one element, it appears to be that the industry and the White House are in a somewhat similar position," said the banking industry official.

That's in part because opening up the discussion to more changes could prove a gamble for both groups.

"There is still a fear that once you reopen Dodd-Frank, you don't know where it's going to go," said Gardner. "That cuts both ways. Defenders don't want it to open, because they are afraid it could be watered down. Banks are probably quietly concerned about the idea of reopening it, because you lose control of the process when that happens and there's nothing to say banks don't lose if you reopen it."

On the other side of the dispute, a number of critics, including Sens. Sherrod Brown, D-Ohio, David Vitter, R-La., and Elizabeth Warren, D-Mass., are pushing for stronger rules. Brown and Vitter introduced legislation earlier this year to significantly raise capital standards at the largest institutions, and Warren has been pushing a bill with several other lawmakers that would separate commercial banking from riskier activities. While those and other plans propose to go further than Dodd-Frank, they also serve to bolster it, by suddenly making the crisis-era law seem more modest by comparison.

"They've realized that you need to go on the offense and force industry to spend more time fighting back. You have a better chance of preserving Dodd-Frank and you give the agencies some cover to adopt stronger rules," said Arthur Wilmarth, a law professor at George Washington University. "It's very unlikely the Federal Reserve would have been able to issue its supplemental leverage ratio proposal if Brown-Vitter had never been introduced. When you see 15% capital as a goal, suddenly 6% doesn't seem unreasonable at all."

Still, Wilmarth warns that the industry is continuing its "ground warfare" against Dodd-Frank by lobbying regulators intensely and slowing the rulemaking process down.

"I think the tone of the conversation has shifted, but in my view the underlying objective has in no way shifted: how to make Dodd-Frank if not go away, be as ineffective as possible," he said. "It's odd when the industry says we have so much to do, when they've done everything they can to pour molasses into the gears of the rulemaking machinery."

At the same time, some observers struck a more optimistic tone, noting that as regulators move forward implementing new rules, they're giving industry and advocates better insight into how the law will actually work.

"I think the two sides have moved closer together this year. The conversation about repeal has moved to improve or correct from one side, and from the other side, the conversation has moved from don't touch to, if the regulators don't get it right, we may need to make some changes," said Aaron Klein, director of the financial regulatory reform initiative at the Bipartisan Policy Center.

Part of that simply comes from seeing the banking agencies iron out the details of exceedingly complex provisions, like the Volcker rule or the qualified residential mortgage rule. As the rules are published, observers have generally been able to put their worst-case-scenario fears to rest.

"The more Dodd-Frank is implemented, the more meat regulators put on the bone, the more people have become invested in the process," Klein said.

Bankers are also increasingly invested as they commit more funds to complying with the law.

"Financial institutions have already spent a large sum of resources on compliance. Some of those transition costs become sunk costs," he added.