The Missed Opportunities of Dodd-Frank

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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.

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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.

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