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 ..
Dodd-Frank backers largely misidentified the causes of the financial crisis and prescribed the wrong solutions to avoid another crisis. The law also included items that had nothing to do with the crisis. U.S. financial regulators turned into micro-managers of financial services rather than facilitators of well-working capital markets.
Starting in 2012, pressures increased to justify new regulations with sound economic reasoning. Agency economists announced economic principles to evaluate new regulations, but few Dodd-Frank regulations meet such objective criteria. As a result, some of the act’s rules have still not been finalized, while most have been implemented without sound economic rationale and more than a few are mired in litigation.
After so many years of implementation, it isn’t possible to repeal all Dodd-Frank regulations. But many parts could and should be repealed, including the following.
New corporate disclosures on conflict minerals, resource extraction (already killed in Congress), and median CEO pay ratio. They don’t provide material information about the value of corporate securities, and they even have unintended consequences that hurt their own goals outside securities valuation. Further, they set precedents for tedious corporate disclosures filled with information not useful for securities analysis.
The risk-retention requirement for asset-backed securities (ABS), which turns regulators into designers of securities instead of facilitators of value-relevant information flow. Investors can decide whether to invest in securities that have little risk retention, if SEC filings contained sufficient information.
Not only was the risk-retention requirement unnecessary, it applies to segments of ABS markets such as collateralized loan obligations that performed better during the crisis while leaving mortgage-backed securities largely exempt — even though the poor performance of MBS was the primary rationale for the rule.
The Consumer Financial Protection Bureau. Such an entity should be restricted to focusing on providing consumer financial education and enhancing competition in consumer financial products. U.S. financial services companies provide consumers with wide choice, but the CFPB impedes innovation and competition and limits consumer choice, because many borrowers are not able to evaluate costs and risks of financial products.
The solution is to improve consumer financial sophistication, not another government agency that crowds out innovation and choice.
The Financial Stability Oversight Council (FSOC), the Office of Financial Research (OFR), and the “Systemically important financial institution” (SIFI) designation. FSOC and OFR are institutions with lofty goals and powerful authorities that are not equipped to deliver on those goals. Financial stability and systemic risk are inadequately defined, and the lawyer-dominated SEC and Commodity Futures Trading Commission (CFTC) are not equipped to process the economic data they collect or to monitor systemic risk.
The Federal Reserve, better equipped to monitor systemic risk, still relies on arbitrary bright lines from Dodd-Frank, such as the $50 billion total assets threshold, and subjects even regional banks to systemic-risk regulations. The FSOC’s non-bank SIFI designation process follows the same bright lines and includes further non-transparent determinations made by political appointees heading federal agencies that make up most of the council.
MetLife, one of four non-bank financial institutions designated as a SIFI, appears to be winning its courtroom battle to free itself from the designation. If the SEC and the CFTC disseminated more of the data they amass from registrants and allowed free markets to process the information, it would help manage risks in the system more than FSOC and OFR could.
Electronic execution requirements for swaps. They should be revised so as to let swaps markets evolve freely rather than be designed by regulators, even though significant costs have already been incurred. Antitrust litigation can and did address alleged collusion by dealers against clearing and efficient execution — which partly led to the inclusion of these requirements in DFA.
Emre Carr is a director in the capital markets group at Berkeley Research Group and formerly a senior financial economist at the Securities and Exchange Commission during the early years of Dodd-Frank implementation.