A master achievement: a vigorous defense of Dodd-Frank.

AuthorBerry, John M.

Four years ago, a sharply divided Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, and its critics still abound. Some argue that it didn't do enough to rein in the financial cowboys whose heedless actions ruined some large commercial and investment banks and threatened to destroy the world's financial system. Others maintain the legislation was misguided, too complex, and so burdensome to financial institutions that it is a key reason the recovery from the deep recession spawned by the financial crisis has been so weak.

Certainly Dodd-Frank has plenty of flaws and its implementation thus far has hardly been perfect. Still, it has greatly reduced the likelihood of another financial crisis by forcing major financial institutions to double their loss-absorbing capital, and it has imposed much stricter oversight of their operations. As Stanley Fischer, the Federal Reserve's new vice chairman who successfully guided the Bank of Israel though the crisis, said recently, "We should recognize that despite some imperfections, the Dodd-Frank Act is a major achievement."

Nevertheless, the financial services industry rails at the new burdens the act has placed on it, including the power of the Consumer Financial Protection

Bureau whose rules regarding items such as bank overdraft fees have reduced profits. So do many Republicans in Congress who tried to stymie the agency's actions by refusing for months to confirm appointment of its director.

Meanwhile, regulators have been slow in drafting many of the rules because of their sheer complexity and determined opposition from financial institutions and some members of Congress. For example, only last month did the Securities and Exchange Commission finally approve new rules for the money market mutual fund industry focused on making such funds less likely to be hit by runs of shareholder withdrawals that were stopped during the crisis by federal guarantees. Some officials at other regulatory agencies, including the Federal Reserve, think the rules are inadequate.

There are justified complaints that the Commodities Futures Trading Commission didn't go far enough in limiting trading in derivatives when it set new rules as required by Dodd-Frank. "The still-too-opaque marketing of derivatives allows banks to hide enormous risk from investors and regulators," Anat R. Admati of Stanford University's Graduate School of Business said in congressional testimony a few weeks ago. Not surprisingly, the big banks that dominate derivatives trading argue the rules go too far.

It's easy to conclude, as Fischer said, that the 2,300-page Dodd-Frank Act is far from perfect. There is general agreement. too, that all the new regulations have not conclusively ended all possibility that a too-big-to-fail, or TBTF, institution might someday require a bailout using tens of billions of taxpayer money to prevent a potential systemic collapse.

As with the Affordable Care Act, aka Obamacare, sharp partisan disagreements mean most of the Dodd-Frank imperfections stand little chance of being fixed. In the case of TBTF, the rules are truly still a work in progress. The very large systemically important financial institutions, known as SIFIs, are required to develop so-called living wills--effectively plans under which they could go out of business. At the same time, regulators are supposed to create a method for the orderly liquidation of a failing SIFT. Neither of these Dodd-Frank requirements is close to completion, and some observers, including Admati, doubt they ever will be.

Too-big-to-fail, though, is altogether an inappropriate litmus test for the success or failure of Dodd-Frank. That fixation is an example of a wish for a guarantee getting in the way of acceptance of a work-in-progress that is already pretty good. In a lecture last month to economists at the National Bureau of Economic Research, Fischer said that TBTF isn't going to go away, probably ever. "A...

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