Introduction

Square-Off: Should Dodd-Frank Stay or Go?

President Trump and many congressional Republicans wants to deregulate corporate America, and the Dodd-Frank Act is the obvious place to start. To date 274 regulations have been promulgated under the law, and 116 more are in the works. The president has, indeed, called for a full repeal of Dodd-Frank. A potentially significant step toward that goal occurred in June, when the House of Representatives voted along party lines to pass the Financial Choice Act, a Republican-sponsored bill that wou ..

In some ways, the Dodd-Frank Act was an over-reaction to legitimate problems revealed by the financial crisis. The law identified many of the right solutions but excessively applied them. In other ways, it barely scratched the surface of a deeper issue — a breach in trust between society and financial market participants.

Luke Zubrod

Luke Zubrod

Even while Dodd-Frank must be revisited to address overreach, businesses have their own role to play in resolving that trust problem.

Seven years after Dodd-Frank’s passage, and with the law’s impact more clearly understood, the Trump presidency has invited a welcome and timely moment of reflection on whether policymakers got it right.

Full repeal should not be the product of that reflection.

Dodd-Frank was effective at metabolizing many of the lessons of the crisis into a more resilient financial system architecture. Through mechanisms such as increased derivatives collateralization and bank capital requirements, it buttressed the system with a more robust cushion against loss. It also took baby steps to rationalize a byzantine U.S. regulatory structure — for example, eliminating the Office of Thrift Supervision and increasing regulatory coordination through mechanisms like the Financial Stability Oversight Counsel.

Still, many of its prescriptions for change were done hastily and piecemeal, causing some to refer to the law as “Frankendodd.” While many of its parts were rational responses to specific problems identified in the crisis, there has not been a robust assessment of Dodd-Frank’s aggregate impact.

Moreover, as various parts of the law take effect, it is becoming clearer that some of them were out of proportion to the problems they were intended to address.

For example, legislators recognized that some market participants (such as Main Street businesses, including manufacturers) should be exempt from derivatives collateralization requirements. However, the exemption was so narrowly drawn that it excluded financial end users — pension funds, financial technology firms, infrastructure funds, etc. — that use derivatives for risk management purposes and in quantities that, as was not the case with AIG and Lehman, raise no concerns of systemic risk.

But even while policymakers work to right-size Dodd-Frank, the societal outrage that brought it into being continues to burn, dimming the near-term prospects of political agreement even on common-sense reforms. And while the policy prescriptions stemming from this outrage are often ill-suited to societal flourishing, the outrage itself holds within it a truth for those of us operating within the capital markets.

Collectively, financial-market participants failed to elevate trust as the North Star guiding their conduct in the markets and with clients. The excessive regulations with which they now contend are ultimately the product and reminder of that failure.

Government ultimately has no power to heal the breach between society and finance. Rather, each of us as individuals and business leaders must examine our firms’ cultures and rework the incentives that guide behavior contrary to the interests of our clients and society at large.

We can start by remembering the noble potential of finance — potential to steward economic opportunity and vitality by allocating capital to great ideas — and managing the risks that come with doing business in a volatile world.

Luke Zubrod is director of strategic initiatives at Chatham Financial, a global risk management advisory and technology firm in the debt and derivatives markets. He is also a member of the market risk advisory committee for the Commodity Futures Trading Commission.

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