WASHINGTON Two progressive groups are set to release a paper Tuesday assessing how far policymakers have come in implementing the Dodd-Frank Act, while suggesting the need for further reform.
The joint paper by Americans for Financial Reform and the Roosevelt Institute is meant to provide a broad overview of both the progress made as well as the challenges that still lie ahead.
"Three years after the Dodd-Frank Act was approved, its practical implications are coming into focus," write Lisa Donner, Mike Konczal, and Marcus Stanley, the editors of the report. "At the same time, we can see the unmet challenges of the transformation of the financial system into one that is safe, more accountable, and truly designed to serve the economy and society as a whole."
While the paper tackles problems revealed during the financial crisis and areas that still lack legislative reforms, it also looks at how the groups feel reform has fallen short as well as what policymakers need to do to address ongoing weaknesses in the system.
Following are
Banks Should Hold More Capital
While banks are being required under Dodd-Frank and Basel III to hold much higher capital than prior to the crisis, some say capital requirements for the largest banks are still too low. "Large systemically-risky financial institutions should carry significantly more capital, with leverage ratios approaching 10% and a risk-weighted buffer above that," writes the Roosevelt Institutes Mike Konczal. "In addition, their capital ratios should be designed to facilitate the FDIC's ability to resolve such institutions, they should hedge against liquidity risks, and they should help maintain the credit cycle against the broader economy."
Yet Capital Is Not a Panacea
Still, Konczal acknowledges that more capital by itself is not the solution "Higher capital will not absolve regulators from having to design a system for the clearing and transparency of derivatives, or a legal regime to allow banks to fail without engendering systemic risk."
Even so, Konczal argues that more capital will make it easier and puts "less pressure on regulators by providing a secondary layer of protection and solvency for the system as a whole."
FDIC Resolution Regime Has to Be Credible
The Federal Deposit Insurance Corp.'s Orderly Liquidation Authority has been deemed as the cornerstone of ending "too big to fail," since it serves as a way for the biggest U.S. banks to fail without jeopardizing the entire system. But while policymakers have found a way to avoid certain problems with OLA using a "single point of entry" approach, there are still questions of how it will actually function. "It is unclear whether or not the OLA will work, and even the terms under which 'working' will mean something," writes Konczal. That's why capital buffers and predetermined debt is necessary to make the job of regulators easier and prevent taxpayers from being on the hook.
In the report, Stephen Lubben, a professor at Seton Hall University School of Law and an expert in corporate finance and governance, financial distress and debt, also raises serious concerns, including whether the FDIC's solution to how to handle derivatives contracts will hold up if challenged. "How does the FDIC get the power to prevent the termination of a contract between two parties, neither of which is in OLA?" he asked.
Shadow Banking Needs to Be Fixed
The paper argues that policymakers need to go beyond Dodd-Frank in addressing the shadow banking system. Marcus Stanley, the policy director at Americans for Financial Reform, suggests two approaches. First, put a stop to "complexity bias" and instead favor a regulatory preference for "simplicity and standardization." Second, work to expand the role of relationship banking, an effort Stanley argues can be addressed in a few ways including through the restoration of an updated version of the Glass-Steagall Act, which separated commercial and investment banking. He also said policymakers could take steps such as "favoring originate-and-hold lending over originate-and-distribute in prudential rules."
Regulatory Enforcement Needs Toughening
While the Dodd-Frank Act called for several new regulations, they mean very little without strict enforcement, the paper said. U.S. regulators should vigorously pursue enforcement of new rules designed to prevent a repeat of the financial crisis. "The hard-won reforms will be meaningless if not enforced, and the industry will continue to fight to limit enforcement," wrote Brad Miller, a former congressman from North Carolina and a senior fellow for economic policy at the Center for American Progress. "Reformers cannot wither up now. They must remain vigilant to advocate for the appointment of regulators and Justice Department officials committed to enforcement."
