The War Over Financial Reform Needs to End

It's time to call a truce.

Industry critics are not villains and bankers are not heroes. Let's try that sentence again, this time with the nouns flipped: Bankers are not villains and critics are not heroes.

It's time for everyone involved in the debate over financial reform to consider the greater good. Our economy needs a well-functioning financial system. That's not a pro-industry platitude. It's a fact.

"We have to move away from trying to put someone in prison," says Lawrence Baxter, a law professor at Duke University. "I know I sound like an apologist for the banking industry but I don't see how we do anything constructive if we don't move away from that attitude."

(To see more posts from Barb Rehm's Blog, click here.)

Baxter urges "a workable system that is not punitive and is actually mutually beneficial."

How unfortunate that this idea sounds novel. But Baxter is right. We have to get over being mad at the industry, or the government, or whoever you're mad at, and work together to craft a better future for finance.

I'm not talking about letting banks skate. I'm talking about ensuring our financial system benefits the economy. That it helps create jobs. That it's still able to take reasonable risks. That it finances dreams and helps investors hedge risks. That is provides a safe place for savers, and even a decent return on that money.

This is my last story for American Banker. My first was in April 1987 and in those intervening 26-plus years, I've written several thousand stories about financial services public policy. I'd like to thank everyone who has helped me along the way.

By definition, news is largely negative. For my final column, I'd like to consider a positive path toward the "workable" system Baxter recommends.

To start, we need to assess how much reform is enough.

Obviously where you sit affects your answer. But let's look at the progress we've made since 2008. Far too often — and I, too, am guilty of this — we complain about how long improvements take or how delayed this or that favored reform is in coming.

But there is no denying the system is safer and sounder than it was in 2007.

Bank capital is at record levels. There is both more of it and it's of a higher quality than before the crisis. Regulators know more about bank capital planning and strategy than ever. Examiners are exercising authority over everything from stock repurchases to dividend payments. The bigger the bank, the tighter the capital squeeze.

The story is similar for liquidity, and supervision has been super-sized. The largest banks undergo regular stress-testing and are being prodded out of business lines that the government considers too risky, particularly capital markets.

While much progress has been made, more is around the corner.

Soon the Federal Reserve Board will finalize an array of tougher prudential regulations called for in Dodd-Frank, and regulators are hard at work on two more rules — one to limit wholesale funding and another to beef up a holding company's ability to absorb losses.

All this is leading our largest banks to simplify their operations and get out of ancillary businesses. Considering their string of missteps, anything that makes the giants easier to manage is welcome.

But remember, prices tend to rise as the number of players in a market declines. The higher compliance costs that accompany tighter oversight will also drive up prices. These consequences must be considered as we move forward.

The overarching question is whether all this will be enough. Should we go further and break up the biggest banks or put a protective ring around units that accept insured deposits?

Possibly, but I think it makes sense to take a breather and assess the impact of all these changes before embarking on structural reform.

For instance, let's see how the mortgage market reacts to new underwriting rules, to the Fed's tapering and to the higher fees being charged by Fannie Mae and Freddie Mac. And let's see what the Volcker Rule's ban on proprietary trading does to competition and markets.

Pausing is not a sign of weakness; it's common sense.

But we need to use the pause wisely. Let's dial back the complaints and the accusations and try trusting each other again. It may not be comfortable but all sides in this need one another.

It's counterproductive for folks like JPMorgan general counsel Stephen Cutler to publicly complain about the cost of enforcement actions, or for Better Markets CEO Dennis Kelleher to call JPM a "one-bank crime spree."

And here I'd urge more intra-industry unity as well. All banks, regardless of size, benefit when the industry does well. The flipside is true. Beating up on the big banks doesn't do community bankers any good.

Perhaps all this boils down to a detailed plea to "play nice." But let's face it, aren't we all better off when we do?

Finally, in the spirit of optimism, I'm going to predict both the Financial Stability Oversight Council and the Office of Financial Research will surprise us in 2014. I've doled out my fair share of criticism of both because these Dodd-Frank creations have yet to live up to their promise.

But in his first year as Treasury Secretary, it's clear Jack Lew wants to see Dodd-Frank succeed; he isn't afraid to use his FSOC chairmanship to coax peace from warring agencies. Exhibit A is the finally finished Volcker Rule.

I see Lew as a thoughtful steward of the financial markets who will ensure reforms don't overwhelm the industry. Remember economic recovery is important to the administration, too.

OFR chief Dick Berner also is showing some encouraging signs. His office is finally gaining traction, highlighting gaps in data collection that we ought to fill if we want to head off another crisis.

The financial system needs leadership. It needs policymakers willing to reconsider reforms when unintended consequences pile up. It needs bankers willing to cooperate with them to reach the law's goals.

Let's agree that not everything in Dodd-Frank will work and nothing in it will end finance.