WASHINGTON – Two and a half years after the U.S. introduced the most significant overhaul to financial regulation in a generation, many of the rules have yet to be completed. Meanwhile, regulators, lawmakers, and the private sector continue to be at odds over the finalized regulations.
After the financial crisis of 2008, lawmakers sought to reduce the chances of another economic crisis by overhauling financial rules and creating new regulatory bodies to protect consumers from abusive lending and mortgage practices. After several months of negotiations between the two parties, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act in June 2010.
Dodd-Frank, which imposed the most significant reforms to the financial sector since the Glass-Steagall Act of 1933, touches almost every aspect of finance. The Act contains sixteen titles, each focusing on a major area of reform, including insurance, derivatives, and proprietary trading. One of the major goals of Dodd-Frank is to subject banks to a slew of regulations along with the possibility of breaking them up if they are deemed “too big to fail.” The law also requires that the largest financial firms build up their capital and liquidity buffers, obtain pre-approval for certain acquisitions, and place restrictions on the riskiest financial activities.
After the legislation passed, its supporters suggested that it would take roughly 12 months to finalize the rules. Two years on, those predictions seem overly optimistic.
In a report released last December, the Government Accountability Office (GAO) said financial regulators had issued only 48 percent of final rules mandated by Dodd-Frank and have missed deadlines for implementing 89 percent of the act’s provisions. The report noted that regulators identified the complex and interconnected nature of the numerous rules as the main reason for the delay.
For the required ban on proprietary trading, for instance, regulators issued draft rules that contained more than 750 questions for public input and produced more than 19,000 comment letters.
Regulators were supposed to finalize the details of the “Volcker Rule,” which would ban banks from proprietary trading, by July 2012. The five agencies responsible for the rule, however, have not finished writing it. The GAO said some rules have stalled as regulators wait for other agencies to craft similar regulations, while other rules require coordination among agencies and with international regulations – each one a time-consuming procedure.
Before the release of a finalized version, rules must be proposed and public comments must be read and incorporated. On top of that, regulators must also take into consideration proposed revisions to the law by legislators.
Earlier this month, Sen. Richard Shelby (R-Ala.), a senior member of the Committee on Banking, Housing, and Urban Affairs, introduced two legislative proposals that would make some changes to the Dodd-Frank financial regulation law.
The first bill corrects numerous drafting errors in the Dodd-Frank law, focusing on technical corrections of some inaccuracies and omissions in the law.
“Dodd-Frank supporters have resisted any changes for over two years,” said Shelby in a statement. “Certainly we can agree to correct purely technical errors.”
Some Democrats, including Sens. Tim Johnson (D-S.D.) and Mark Warner (D-Va.), have said they would be willing to consider some technical fixes to the financial regulation law.
The second bill, titled the Financial Regulatory Responsibility Act of 2013, holds financial regulators accountable for rigorous, consistent economic analysis on every new rule they propose. The financial regulation bill mandates that if a rule’s cost outweighs its benefits, regulators cannot push the regulation forward.
Shelby introduced similar versions of the two bills in the previous Congress – one in 2011 and the other one at the end of 2012. Both of the bills did not make it out of the Senate Banking Committee.
As in Shelby’s previous attempts in changing Dodd-Frank, the Chamber of Commerce has come out in support of the legislation.
“The use of cost benefit analysis in rulemaking is a significant issue of public policy,” the Chamber’s R. Bruce Josten wrote in a statement.
“Smart regulation requires a full understanding of the economic consequences in both the proposal and post implementation operation of a rule. Too often, cost-benefit analysis in the realm of financial services rulemaking has been inadequate at best and has failed to provide stakeholders and regulators with a clear understanding of the issues at hand,” Josten continued.
Shelby’s two legislative proposals aim at clarifying and streamlining the implementation of Dodd-Frank.
“The bottom-line principle of the Financial Regulatory Responsibility Act is unambiguous: If a regulation’s costs outweigh its benefits, it should be thrown out. By providing a clear, rigorous, and consistent process for regulators in making that determination, this legislation will eliminate unnecessary burdens on our economy,” said Shelby.
Shelby’s financial regulation bill would require a cost-benefit analysis by all financial regulators and allow retrospective evaluations of rules after being implemented. This analysis would help the public consider what each rule is intended to accomplish and specify the costs of achieving those objectives.
The bill also aims at reducing the burden of existing regulation through several measures. For instance, it would require agencies to develop plans to modify existing regulations, to make the agency’s regulatory program more effective or less burdensome in achieving its objectives.
The bill would create a Chief Economist Council consisting of the chief economist of each agency and require them to submit an annual report to Congress on their activities. Finally, the bill would require agencies to incorporate data and analyses provided by the public during the comment period.
Last year, former Treasury Secretary Tim Geithner attacked conservatives and the business sector for pushing back on federal regulations, calling it “a determined effort to slow and weaken reforms that are critical to our ability to protect Americans from another crisis.”
“The forces working against reform are trying a range of different strategies, including…efforts to use cost-benefit analysis as roadblocks to reform,” Geithner said.
Other critics have condemned similar attempts by Republicans as a tactic for watering down the already-delayed legislation.
Eliot Spitzer, the former governor of the state of New York, accused Republicans of wanting to stop any regulations to financial reform.
“These lawmakers are using the responsible-sounding buzzphrase ‘cost-benefit’ to hammer home their misguided belief that somehow the various rules mandated by Dodd-Frank to regulate the market will cost more than the resulting benefits to the market,” said Spitzer.
Dennis Kelleher, president and CEO of Better Markets, has criticized the efforts too, saying, “When you hear someone talking about cost-benefit analysis you have to ask: cost to whom, plus benefit to whom.”
Tying all loose ends on Dodd-Frank is a major priority of the Securities and Exchange Commission (SEC) chairman-nominee Mary Jo White, whose nomination has moved to the full Senate after being approved by a Senate committee last week.
“The SEC needs to get these rules right, but it also needs to get them done,” White told the Senate Banking Committee at her confirmation hearing.
Shelby is open to the idea of working together with Democrats on the issue.
“Sen. Shelby would welcome it. This shouldn’t be a partisan issue,” said Jonathan Graffeo, Shelby’s communications director. “Both parties should want to correct objective errors in the law and eliminate regulations that hurt job creation and economic growth more than they help.”