Dodd-Frank won’t be going anywhere
The Republican-controlled House of Representatives recently passed a bill meant to repeal a landmark law enacted under President Barack Obama.
No, I’m not referring to the Affordable Care Act but rather the Dodd-Frank Act. The law, passed in 2010, was designed to prevent another banking meltdown like the one that precipitated the Great Recession, the worst economic crisis in the United States since the 1930s.
But no matter how much President Trump wants to unravel his predecessor’s legacy, he and his allies must know that even outright repeals cannot negate the new realities unleashed by the laws. Because of the Affordable Care Act, health care has morphed from just another cog in the U.S. economy to a fundamental expectation that all citizens, regardless of age, income or geography, should receive
some level of care.
Similarly, Dodd-Frank has created new facts: mainly, the belief that banks must not again become too big to fail and that taxpayers must not bail them out if they do. That mind-set will remain no matter what happens to the law.
“Dodd-Frank is not going away,” said Jackie Prester, a former federal bank examiner who now chairs the financial services transactions group at Baker Donelson law firm in Memphis. And while Congress will probably wind up just tweaking Dodd-Frank, the real issue is not the law itself but rather how the regulatory agencies implement it, she said.
One of the core principles of Dodd-Frank was that large banks like JPMorgan, Citibank and Wells Fargo in San Francisco must carry more capital on their balance sheets against liabilities like loans and mortgages. The Federal Reserve is implementing international standards that require banks to possess enough highly liquid assets (things they can quickly turn into cash) to cover obligations over a 30-day period — sufficient time for the feds to take action to stabilize the industry.
The idea is to not only prevent a panic and a run on the banks but also to discourage banks from risky behavior. Requiring banks to put up more cash to cover risk means they will be less likely to do something risky.
“Dodd-Frank is very, very big on strong capital requirements,” said Clifford Rossi, a former chief risk officer at Citigroup’s consumer lending unit who now teaches finance at the University of Maryland. “You can cure a lot of sins by pushing the industry to take smaller risks.”
The House bill, however, provides an “offramp” for banks to get exemptions from these Dodd-Fank requirements providing they maintain “high levels of capital.”
That worries Rossi, who fears that banks will go crazy again.
“Banks don’t need a lot of encouragement to say, ‘We can push the pedal to the metal,’ ” he said.
It’s not clear whether this provision will survive the Senate. Because of Dodd-Frank, the industry is now well capitalized, which has significantly reduced the prospect of another banking crisis.
“Increased capital requirements and stronger regulation and supervision has created a much safer financial sector,” according to a report by the Brookings Institution think tank in Washington.
The other enduring feature of Dodd-Frank is the creation of the Consumer Financial Protection Bureau. To conservatives and Republicans, the agency is just another example of yet another unnecessary federal bureaucracy stifling the economy.
But the House bill does not call for the abolition of the agency — just greater control over it.
For that reprieve, supporters of the agency’s work can thank Wells Fargo.
In September, the agency fined the bank $100 million because employees opened savings, checking and credit card accounts in the names of customers, without their consent, to meet aggressive sales goals. Wells Fargo eventually admitted that a wayward sales culture had prompted employees to create up to 2 million fraudulent accounts.
That led to CEO John Stumpf ’s sudden retirement and instituted reforms throughout the company to prevent another such scandal.
Although several agencies, including the Office of the Comptroller of the Currency and the Federal Reserve, already regulate banks, it was the Consumer Financial Protection Bureau that brought the scandal to the attention of Congress and the broader public. Which begs the question: Without Dodd-Frank, would Wells Fargo employees have gone on engaging in fraud unchecked?
“That’s a fair question,” said Prester, who previously worked at the Office of the Comptroller. “Why didn’t any of the other regulators see it before Dodd-Frank?”
In other words, the agency did exactly what Dodd-Frank created it to do: focus on protecting consumers in a way other regulators couldn’t or wouldn’t.
So Dodd-Frank may get chipped away. But the law’s legacy is intact: higher expectations of our banks, and higher expectations of their regulators. Those are written in our minds, not in the text of any bill.
“Dodd-Frank is very, very big on strong capital requirements. You can cure a lot of sins by pushing the industry to take smaller risks.” Clifford Rossi, who teaches finance at the University of Maryland