Year-old Dodd-Frank punches, if below its weight
By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
NEW YORK – Happy Birthday, Dodd-Frank. With a final 848 closely-printed pages of law and over 3,300 pages of rules (and counting, thanks to bank lobbyists), the U.S. financial reforms passed a year ago are cumbersome. But they can’t be written off as a useless doorstop. Despite flaws and financial industry bleating, sound new measures are taking shape.
Chief among the better outcomes is higher bank capital, helped by the internationally agreed Basel III standards. And with a bit of luck, the new systemic risk council will force regulators to talk to each other about where trouble might be brewing. Potentially, that could even result in pre-emptive action to spike the next obvious credit bubble.
It’s also virtually unassailable that the over-the-counter derivatives market, formerly all but untouched by regulation, needed to be reined in. The devil is still in the detail, and bankers worry about the different paces and directions of the Commodity Futures Trading Commission and the Securities and Exchange Commission. Though some rulemaking has unsurprisingly been delayed, what’s emerging is more pragmatic than many in the financial industry had feared.
One disappointment is the evident failure to end “too big to fail” — one of the law’s few specific objectives. Instead, the biggest financial firms will, in essence, be designated as such. That should mean they are forced by regulators to hold extra capital or take less risk. And efforts in Dodd-Frank to ensure banks can be wound down safely are laudable, if practically challenging. But it’s a pity there’s still an implication that in the worst case the government would step in.
Smaller reforms, like mandatory say-on-pay shareholder votes at public companies, are good for keeping over-greedy managers honest. But there’s plenty in Dodd-Frank that seems misplaced, from the too-blunt Volcker rule to the conflict inherent in regulating credit rating firms more tightly while aiming to eliminate their ratings from rules and regulations. And though America is ahead of Europe in implementing reforms, unfortunately the early solidarity about international consistency has now diminished.
The new consumer protection bureau is attracting more controversy than it is probably worth. Meanwhile, oddities like rules making companies disclose the use of certain African minerals look especially incongruous alongside one glaring gap in the law. Though it regulates parts of the mortgage finance chain, it steers clear of reforming Fannie Mae and Freddie Mac. Dodd-Frank does punch — if below its printed weight. But that’s one missed blow that could yet cause political and financial trouble.