econscius

Posts Tagged ‘Dodd-Frank’

CFO Magazine Update on Delayed Dodd-Frank Implementation

In Obama Administration, Regulation on August 16, 2012 at 1:03 am

Most don’t read CFO magazine, except perhaps when suffering insomnia.  Suspecting you missed it, I linked a piece on Dodd-Frank implementation below [1] (free, no paywall).  Randy Myers’ article is called Unfinished Business.  While the Obama Administration takes credit for the bill, it is not yet implemented because regulators are far behind schedule writing the rules.  No one knows exactly what the end result will be.

Some highlights are repeated below.

Yet because the legislation was drafted so hurriedly, and because the matters it tackles are so complex, Congress left much of the heavy lifting to regulators, saddling them with nearly 400 rulemaking requirements and calling upon them to complete dozens of studies.

It didn’t happen. By June 1 of this year, understaffed and overwhelmed regulators — at the Securities and Exchange Commission, the Federal Reserve, the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency, and elsewhere — had finalized only 110 of the 398 regulations they were tasked with crafting, according to law firm Davis Polk & Wardwell. They had missed 148 deadlines, including 21 for which they had not even issued any proposed rules.

They faced another 140 future rulemaking deadlines, including 123 where they had no proposed rules on the table, and a clutch of additional rulemaking requirements for which they had been given no deadline. Former SEC commissioner Annette Nazareth, now an attorney with Davis Polk, says it will probably be “at least well into 2013” before rulemaking is completed. In some cases, implementation could stretch beyond that.

With so much rulemaking yet to be done, it is probably unfair to ask if Dodd-Frank has succeeded so far in creating a stronger and more secure financial system in the United States. “I think we’ve got a long way to go before we can judge Dodd-Frank,” says Carol Beaumier, an executive vice president with Protiviti, a consulting and internal audit firm.

 National Bank Oamaru.jpg

Still, skeptics, and outright critics, are abundant…. “I think it [Dodd-Frank] has done little to solve our problems,” says Kevin Williams, CFO of Jack Henry & Associates, a $967 million provider of information-processing solutions to community banks. In the two years since the law’s passage, Williams notes, the nation’s biggest banks have gotten bigger, not smaller, with the six largest holding assets equal to 63% of the country’s gross domestic product. That makes their potential failure an even bigger concern than it would have been in the past, he contends.

An excellent point is made below; regulation is looked at as preventing financial mistakes but that is neither realistic ex ante nor is there a track record of regulation preventing financial blow-ups.  The 2008 American financial crisis started in the heavily regulated mortgage business.

“No law can prevent incompetent management or fraudulent management,” warns Jeffrey Burchill, CFO of insurance company FM Global. “You can penalize people for gross error or gross misconduct, but it’s very difficult to prevent that conduct.”
 
All laws, especially sweeping, complex ones, have unintended side effects and one quite plausibly is increase the compliance costs of smaller banks, leaving fewer large banks.  Large banks, of course, create systematic risks when they fail that smaller community banks cannot.  Smaller, local banks tend to be more responsive to local business lending needs, too.
 

Meanwhile, small community banks are being hurt by the cost of complying with a law written in response to problems created by large banks, says Williams. That charge has been echoed by former FDIC chairman Bill Isaac, now chairman of Fifth Third Bancorp., who has said he wouldn’t be surprised if half of the nation’s community banks go out of business if they don’t get some relief from Dodd-Frank.

“I think Dodd-Frank was a political response to an economic problem, and history tells us that is not always the best solution,” says Isaac.

If Williams proves prescient, Dodd-Frank will have been a large, costly, and ultimately misguided effort to strengthen the financial markets. Yet in light of the ongoing devastation wrought by the 2008 credit crisis — to the financial and housing markets and economies around the world — it is probably unrealistic to expect that policymakers would not have tried.

[1] http://www3.cfo.com/article/2012/8/regulation_dodd-frank-act-progress-report-volcker-rule-swaps-derivatives-regulation

Pictures from Wikipedia Commons.