To say the year-old Dodd-Frank Wall Street Reform and Consumer Protection Act is under attack in Washington is like describing Little Big Horn as an engagement between the cavalry and the Indians.
Efforts by U.S. regulators to require megabanks to maintain more capital have been weak. Internationally, the Basel Committee on Banking Supervision has proposed (Basel III) that banks hold 7 percent of common capital as a percentage of their risk-weighted assets, with a possible 2 percent to 3 percent surcharge for the megabanks. But Basel III is not binding on individual nations and its new capital requirements would not go fully into effect until 2019.
The banks deemed too big to fail in 2008 and had to be saved by the massive Troubled Asset Relief Program and unprecedented help from the Federal Reserve have never been forced to slim down. The blind hand of the market charges the big six banks lower interest rates than smaller banks. The message of the market is clear: the government is cannot allow these banks to fail.
The central solution proposed in Dodd-Frank to avoid future bailouts is resolution authority. But no one has come up with a workable resolution plan for massive financial institutions with outlets everywhere. Different countries are promulgating different resolution rules — the U.S. with a "living will" for the banks and other countries with proposals for special bonds or contingent capital.
The best way to curb the risky activities of megabanks would have been to reinstate a new version of the Glass-Steagall Act. From its enactment in 1933 until it was repealed in 1999, Glass-Steagall required that commercial banks, insured by the FDIC, be separate from investment banks and the risky investments those banks make. Instead, Dodd-Frank includes a weakened version of a proposal by former Federal Reserve Chairman Paul Volcker requiring banks to separate proprietary trading from commercial activities. Many of us thought it would be impossible to create a proprietary trading definition that does not allow creative Wall Streeters to proceed with business as usual. It looks like we were right.
No one questions the major role derivatives played in the financial meltdown. The Commodity Futures Trading Commission was supposed to come up with regulations on derivatives by July 16. The commission recently announced there would be a delay of six months or so. Why? Certainly because the task is complicated, but also because the commission is dealing with a new Republican House of Representatives that seems dead-set against any kind of regulation at all.
One of the most promising parts of Dodd-Frank was the Consumer Finance Protection Board. Led by Interim Director Elizabeth Warren, the CFPB has been successfully staffed and organized. Now President Baraack Obama has nominated Richard Cordray to be its first director. Unfortunately, Senate Republicans say they will confirm no one until there are "major structural changes" in the agency. The CFPB can make no rules without a confirmed director.
