Reforming the Reform
Two years after the passage of the Dodd-Frank Act, both sides of the aisle can agree that the law is in need of some vast improvements.
On July 21, the Dodd-Frank Act (DFA) will pass the two year mark. Today, annual compliance costs of Dodd-Frank are expected to exceed $7 billion—even though only 119 (29.9%) of the 398 total required rulemakings have been finalized. The projected number of new personnel required to comply with Dodd-Frank is over 26,000, and that’s only for the regulations that have been issued. Not to beat a dead horse—but this is a massive law.
On the two year anniversary, here’s a checklist of some good things that came out of DFA, and some measures which have imposed serious economic consequences:
Some Worthy Developments:
- Reporting of Derivatives Data: New rules that create centralized data repositories to store derivatives information will be helpful to the overall system.
- Orderly Liquidation Authority (OLA): Since the economic collapse, the county’s largest financial institutions have created “living wills” which will guide regulators during a liquidation process if a financial firm fails. Today, the FDIC has authority over banks to use OLA. Read: no bailouts.
- The Federal Insurance Office (FIO): While the FIO has yet to produce a report, this new office will help modernize insurance regulation and streamline the patchwork of state-based insurance regulations that currently exist.
- Consumer Protection: Although the structure of the CFPB suffers from some fundamental governance problems, the mission of protecting consumers is one that we respect.
From Bad to Worse:
- Durbin Amendment: A last-minute add on, interchange rules have cost the financial industry about $12.2 billion annually, translating into 20% higher fees for consumers, according to a Javelin study from February 2012. As a result of these price controls, traditional conveniences such as free checking have all but disappeared.
- Volcker Rule: By limiting practices deemed “too risky”, which were not causal to the financial crisis—the Volcker Rule will cost American businesses up to $315 billion through the total result of lost liquidity, increase direct borrowing costs by up to $43 billion per year, and dramatically reduce liquidity according to a January 2012 Oliver Wyman Study.
- Fiduciary Duty: Shortly after the Dodd-Frank Act was signed into law, the Department of Labor sought to regulate broker-dealers and investment advisers in a manner that conflicts with the SEC’s efforts at uniform fiduciary standards, and worse, would eliminate approximately 7 million existing retirement accounts.
- CFPB: The current governance model of the CFPB has neither budget nor regulatory accountability to Congress nor to an oversight Board. A more normal governance structure is a 5-7 member bi-partisan Board, rather than a sole Director with unilateral regulatory authority.
- Cumulative Weight: It is an understatement to say that the industry is drowning in regulation. According to the American Action Forum, the regulations issued so far under DFA will impose 52.7 million hours of paperwork alone. These compliance costs take away from every new loan, product or service to the American consumer. U.S GDP is projected to be 2.7% lower than it would otherwise be by 2015 as the result of regulatory reform (according to the Institute for International Finance Report.)
What does this mean? We’re not trying to repeal Dodd-Frank as a whole, but the law can be and should be improved.
Are financial services firms safer today? Yes. Are we stronger than pre-crisis levels? Without a doubt.
But in its current state, the regulatory regime stifles competitiveness, curtails economic growth, limits availability of credit, and results in higher costs.
What to do?
Here’s a start: Repeal Durbin. Rewrite Volcker. Restructure the CFPB.
Then conduct a full Congressional review of the entire 2300 pages, hear all sides, and listen to experts. Adopt legislative improvements that hold fast to safety and soundness, and enhance economic growth.
In short, reform the reform.
To view the DODD-FRANK 2-YEAR ANNIVERSARY REPORT, please click here.