Five years after the Dodd-Frank financial overhaul became law, there are still questions swirling around the Wall Street makeover.
President Obama vowed in 2010 that the new law would bring much-needed financial protections for consumers, new rules of the road for Wall Street and a resolute end to reviled bank bailouts.
But half a decade later, the debate around the law continues. Regulators are pushing to finalize still lingering projects. New government powers have yet to be tested.
And lawmakers in both parties continue to question whether the law’s central goal, ensuring “too big to fail” is a thing of the past, was actually achieved.
There are undoubtedly major parts of Dodd-Frank that are fully up and running. Perhaps most notable is the Consumer Financial Protection Bureau. Five years in, the CFPB has gone from a concept in statutory language to a full-fledged agency with nearly 1,500 people on staff that has returned billions of dollars to consumers treated unfairly in the financial marketplace.
The broad contours of the law are largely in place because regulators emphasized getting done the major projects first. For example, the highly complex Volcker Rule, which bars banks from engaging in risky
proprietary trading for their own profit, is effectively finished and banks are already adjusting their business to adapt.
Elsewhere, regulators have put in place new checks on financial derivatives, begun implementing new rules in the mortgage market and taken steps aimed at predicting and preventing broad new threats to the overall financial system.
“The general approach is: like it or not, this is the new reality,” said Wayne Abernathy, with the American Bankers Association.
But there are still projects lingering. For example, liberals are openly griping about the slow pace the Securities and Exchange Commission has taken in writing executive pay rules, particularly one requiring a company to publicly detail the pay ratio between the CEO and that company’s average employee.
The law firm Davis Polk estimates that just 63.3 percent of Dodd-Frank rules have been finalized, with 21.3 percent of the required rules not yet even proposed.
And the nation’s biggest banks still need to prove to regulators that they can safely be wound down in bankruptcy should disaster hit. The Federal Reserve threw out the “living wills” submitted by banks in August as inadequate and just received revisions earlier this month. If regulators are still unconvinced the big banks can be dissolved in an orderly fashion, they could order banks to shrink down or alter their structure to be safer.
Meanwhile, the debate on Capitol Hill continues unabated. Republicans have declared the law a failure, helping big banks grow while driving small banks out of business. And Democrats have dug in on defending the law from major changes while pushing for even tougher steps to be taken against Wall Street giants.
One of the larger challenges in rendering a verdict on Dodd-Frank is that so many of the new tools and powers it handed to regulators will not be tested until the next time adversity hits.
For example, Dodd-Frank gives regulators the power to step in and wind down an ailing financial institution to avoid
broader systemic damage. This “orderly liquidation authority” is in place on paper, but it is impossible to say if it will really work until it’s put to use.
Elsewhere, new entities established to sniff out pending threats, such as the creation of the interagency uber-regulator known as the Financial Stability Oversight Council and the Office of Financial Research, are hard at work. But proving a crisis was avoided is inherently difficult.
“Unfortunately, for good or bad, so much of Dodd-Frank depends on how this performs in the next crisis,” said Mark Calabria, director of financial regulation at the Cato Institute.
And others argue that, in terms of preparing for the next crisis, regulators have a long way to go.
“You can tell that even in terms of preparation, we aren’t where we should be,” said Marcus Stanley, policy director for Americans for Financial Reform. “If you do a fire drill, it doesn’t give you the experience of having gone through a fire. But you can tell if you’re prepared for a fire.”
There are signs that new rules put in place post-crisis have helped shore up the financial sector. Most large banks have shown through government-run “stress tests” that their books can withstand a massive economic downturn, as banks have boosted their capital levels, increased liquidity and reduced risk.
And regulators are now subjecting the biggest and most interconnected financial shops to heightened scrutiny and tougher rules in a bid to prevent another meltdown of 2008’s caliber.
As that crisis recedes from view, experts warn that regulators need to be constantly vigilant about new threats emerging from the financial sector.
Michael Barr, a former Treasury Department official who was central to the crafting of Dodd-Frank, said the law gave
regulators the powers they need to police the financial sector but that there are looming threats that remain unaddressed.
For example, he identified as a problem the continued used of the London Interbank Offered Rate (Libor) as a benchmark interest rate, even after several banks admitted traders manipulated it to maximize profit. Regulators have discussed coming up with alternative benchmarks, but no action has been taken.
“The fact that we still rely on Libor even though it was fraudulently manipulated for years ... I think that’s a mistake,” said Barr, now at the University of Michigan Law School. “Another big area ... is high frequency trading, I think that regulators are only beginning to wrap their arms around potential issues both on fairness and safety.
“Broadly speaking, the law has hit the mark,” he added. “
While policymakers work to get the rest of Dodd-Frank up and running, Wall Street watchers are already preparing for their next move. The financial industry and Republicans are hoping that as the crisis fades, the opportunity to revisit the law and make changes, ranging from technical tweaks to substantial reforms, will grow.
And liberals and Wall Street reform advocates are already loudly calling for steps beyond Dodd-Frank, arguing the law was at best a good first step.
Yet while the debate continues, there is little indication Dodd-Frank is going anywhere.
“Compare it to the healthcare bill, and the striking fact is that there has been much less controversy,” said former Rep. Barney Frank (D-Mass.), one of the law’s titular sponsors. “It’s certainly not going to be repealed now.”