Dodd-Frank: What It Does and Why It's Flawed


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Dodd-Frank: What It Does and Why It's Flawed

  1. 1. Dodd-­‐Frank:  What  It  Does  and   Why  It’s  Flawed   Hester  Peirce   Mercatus  Center  at  George  Mason  University   Senior  Research  Fellow   March  6,  2013  
  2. 2. Our  Agenda  q Discuss  Dodd-­‐Frank’s  objecMves  q Discuss  why  those  objecMves   were  not  met  by  Dodd-­‐Frank  q IdenMfy  areas  of  Dodd-­‐Frank  that   could  give  rise  to  new  problems    
  3. 3. DISCLAIMERS  •  Given  its  breadth,  there  is  no  such  thing  as  a   Dodd-­‐Frank  expert.  •  The  text  and  pictures  on  the  slides  are  not   intended  to  provide  a  comprehensive   summary  of  Dodd-­‐Frank.  •  Studies  have  shown  that  thinking  about  Dodd-­‐ Frank  can  be  harmful  to  your  health.      
  4. 4. Timing  Problem       January   2011        July  21,  2010  2:49  PM  Signing  the  Wall  Street  Reform  and  Consumer  Protec7on  Act    
  5. 5. Key  Dodd-­‐Frank  ObjecMves  q End  taxpayer-­‐funded  bailouts  q Make  financial  system  more  stable  q End  abusive  pracMces  that  hurt  consumers  q Regulate  in  areas  that  have  not  been   regulated  a  heavily  as  some  believe  they   should  be  q Enable  large  financial  enMMes  to  be  wound   down  
  6. 6. Key  Dodd-­‐Frank  Failings  q Did  not  reform  the  housing  finance  system  q Did  not  end  taxpayer-­‐funded  bailouts  q Encourages  financial  industry  concentraMon  q Harms  consumers  through  higher  prices  and   fewer  opMons  q Relies  too  heavily  on  regulaMon  and   undermines  market  discipline    
  7. 7. Eliminated  by  Dodd-­‐Frank   Agencies  and  Offices  Added  by  Dodd-­‐Frank   SEC  Office  of   Office  of  Thri   Bureau  of  Consumer   SEC   Investor   Supervision   Financial  ProtecMon   Ombudsman   Advocate   Financial  Stability   SEC  Office  of   CFTC  Office  of   Oversight  Council   Credit  RaMngs   Whistleblower   SEC  Office  of   Minority  &   Office  of  Financial   Municipal   Women   Research   SecuriMes   Inclusion  Off’s   HUD  Office  of   Federal  Insurance   SEC  Office  of   Housing   Office   Whistleblower   Counseling  
  8. 8. Speed  Walking  through  Dodd-­‐Frank  In  walking  through  the  Mtles,  keep  an  eye  out  for  •  Confidence  in  regulators’  ability  to  idenMfy   and  solve  problems  •  Wide  discreMon  and  limited  accountability  for   regulators  •  Diversion  of  regulatory  focus  from  key  issues  •  Costly  new  regulatory  regimes  
  9. 9. Title  I   What  it  Does   Treas-­‐   CFTC   SEC   Fed   FDIC  •  Establishes  the  FSOC     ury  •  Establishes  the  OFR   Ins.   OCC   FHFA   NCUA   CFPB  •  Gives  Fed  power    to  impose   Rep.   enhanced  prudenMal    standards   State   State   State   OFR   FIO   Ins.   Sec.   Bank   Why  It’s  Flawed   Financial  Stability  Oversight  Council  •  FSOC  hasn’t  been  transparent,  hasn’t   coordinated,  displaces  regulators  •  DesignaMng  specific  firms    as  TBTF   IdenMfy   Make   dulls  market  discipline   SIFIs/ IdenMfy   Regulat•  Fed  not  fit  to  regulate  nonbanks   FMUs/   risks   -­‐ory   AcM-­‐•  OFR  is  not  accountable   rec’s   viMes  
  10. 10. Title  II   What  It  Does   Fed  &  FDIC  (or  SEC  or  FIO)  •  Establishes  an  FDIC-­‐run  resoluMon   make  recommendaMon  re   alternaMve  to  bankruptcy   a  financial  company  or     subsidiary   Why  It’s  Flawed   DeterminaMon  by  Secretary  •  Instead  of  reforming  the  bankruptcy   model,  abandons  it     Company  is  noMfied  •  Vague  criteria  for  selecMng   companies  makes  many  companies   potenMal  resoluMon  targets.   Review  by  •  Broad  regulatory  discreMon  with  only   court:  Limited   limited  judicial  oversight   in  Mme  and   FDIC   scope,  •  Possibility  for  certain  creditors  to  be   favored   appointed   confidenMal  •  Possibility  for  companies  to  be   as  receiver   propped  up   Limited  Appeal  
  11. 11. Title  III   What  It  Does  •  Eliminates  OTS   Office  of  Thri  •  Raises  deposit  insurance  to  $250,000     Supervision  •  Expands  assessment  base  for  deposit     insurance  to  total  consolidated  assets   Federal-­‐ State-­‐ Savings  and   minus  tangible  equity   chartered   chartered   Loan  •  Offices  of  Minority/Women  Inclusion   savings   savings   Holding     associaMons   associa-­‐ Companies     Mons   Why  It’s  Flawed  •  Deposit  insurance  dulls  market  disc-­‐ ipline,  increases  systemic  instability  •  Adds  a  new  layer  of  bureaucracy  at   Fed   OCC   FDIC   each  financial  regulator    
  12. 12. Title  IV   What  It  Does   Hedge   RegistraMon  •  Hedge  fund/private  fund  SEC   Fund   registraMon     Adviser  •  Raises  threshold  for  adviser  SEC   SEC   registraMon   Private  •  Prevents  investors  from  counMng   Equity   RegistraMon   their  home  towards  accredited   Fund   investor  threshold   Adviser     DeregistraMon   Why  It’s  Flawed   Advisers  •  SEC  resources  diverted  to  watch  out   with   RegistraMon   for  wealthy  investors   $25-­‐100   States  •  New  costs  for  private  fund  investors   mill  
  13. 13. Title  V   What  It  Does   Department  of  Treasury  •  Creates  Federal  Insurance  Office      •  Makes  changes  to  surplus  line   Federal  Insurance  Office   insurance  and  reinsurance  regulaMon     Why  It’s  Flawed  •  The  FIO  has  largely  unconstrained   Monitor  &  Report   ability  to  demand  informaMon   Recommend    •  FIO  hasn’t  released  report   SIFIs     Consult  and  •  DesignaMng  insurance  companies  as   &  Advise   Coordinate   systemic  aggravates  TBTF  problem   and  introduces  an  inexperienced   Con-­‐ regulator  in  the  insurance  space   FSOC   States   gress  
  14. 14. Title  VI   What  It  Does  •  Expands  Fed’s  regulatory  authority   Fed  •  Implements  Volcker  Rule     FBO   Why  It’s  Flawed   Inter-­‐ Bank  / Secur-­‐•  Too  much  power  to  the  Fed   Non-­‐ Thri   iMes   media bank  •  Fed  will  be  more  invested  in  propping   Holding   Hold-­‐ te   SIFIs   up  a  lot  of  financial  enMMes   Co   ing  Co   Hold-­‐•  Volcker  Rule  could  make  it  difficult   ing  Co   for  banks  to  engage  in  legiMmate   hedging  and  market-­‐making   Subsidiaries  and  Affiliates   acMviMes,  and  market  liquidity  could   suffer   FuncMonal  Regulators    
  15. 15. Title  VII   What  It  Does   Ex-­‐ Swap  •  Assigns  regulatory  responsibility  for   change Dealer/ Swap  Dealer   OTC    derivaMves  market  to  CFTC/SEC   /  SEF   MSP/Fin’l  •  Reshapes  OTC  derivaMves  market  by   End  User   mandaMng  reporMng,  use  of  central   clearinghouses,  exchanges  and  regu-­‐ laMng  dealer-­‐customer  interacMons   Non -­‐fin’l   FCM     End   Swap  Data   Why  It’s  Flawed   User   Repository  •  Fragments  derivaMves  regulaMon     Pub-­‐ SEC/  •  Imposes  inapt  regulatory  scheme     lic   CFTC  •  Harms  end  users  •  Clearinghouses  are  systemic  risk   Clearinghouse  •  ImplementaMon  has  been  careless  
  16. 16. Title  VIII   What  It  Does  •  FSOC  designates  systemically   Financial  Stability  Oversight  Council   important  FMUs  &  payment,  clearing,     sehlement  acMviMes    •  Grants  Fed,  SEC  &  CFTC  authority  to   prescribe  risk-­‐management  standards   for  designated  uMliMes  and  acMviMes  •  Allows  for  expansion  of  Fed  discount   and  borrowing  privileges     Systemically   Financial   Why  It’s  Flawed   important  PCS   Market  UMliMes  •  New  class  of  TBTF  enMMes     acMviMes  •  Expands  government  safety  net  •  Grants  broad  regulatory  power  over   firms  engaged  in  designated  acMviMes   Fed   SEC/CFTC    
  17. 17. Title  IX   New   Broker/   SRO/   New   What  It  Does   Investor   Dealer   PCAOB   Muni  •  Creates  new  SEC  bureaucracies   Offices,   Fiduciary   Reforms   Advisor  •  Grants  SEC  new  enforcement  powers     TesMng  &   Duty     Regime   Studies    •  New  corp  gov/exec  comp  mandates   Restrict   New  SEC   Say-­‐on-­‐ Proxy  •  Removes  credit  raMngs  from   Mandat-­‐ enforce-­‐ Pay   Access   regulaMons,  increases  CRA  regulaMon     ory  Arbi-­‐ ment  •  Risk  retenMon  &  other  ABS  regulaMon   traMon   powers     Pay  RaMo   Comp.   Claw-­‐ SEC   Why  It’s  Flawed   Pay  for   Comm-­‐ backs   Funding   Perform.   ihees    •  Laundry  list  of  changes,  mostly  unre-­‐ Disclos.     lated  to  crisis  or  financial  companies   Credit   SecuriM-­‐ SEC   Whistle-­‐ Re-­‐•  Relevant  reforms  are  poorly  executed   RaMng   zaMon   Organiz-­‐ blow-­‐   late  •  Hurts  small  &  Main  Street  companies   Agency   Reform   aMonal   er   to  •  Credit  raMng  agency  reforms  work  at   Reform   Reform   program   Cris-­‐ cross-­‐purposes   is  
  18. 18. Title  X   What  It  Does   Fed  •  Creates  CFPB  and  gives  it  broad  new   Bureau  of   regulatory  powers   Consumer  •  Durbin  amendment,  which  directs   Financial   the  Fed  to  cap  fees  banks  can  charge   ProtecMon   merchants  for  debit  card  transacMons   Senate       Nominates   Confirms   Why  It’s  Flawed   Pres-­‐•  CFPB’s  structure  lacks  accountability     Con-­‐ ident   Director   gress  •  Likely  to  result  in  limiMng  consumer   financial  products  and  increasing   Limited  FSOC     their  prices     Review  •  Durbin  amendment  imposes  market-­‐ Enforce-­‐ distorMng  price  controls   Rules   Guid-­‐ ment   ance   AcMons  
  19. 19. Title  XI   What  It  Does   Emergency  Lending  by  Fed  •  Limits  Fed’s  emergency  lending   authority     Fed  •  Requires  congressional  approval  for   FDIC  emergency-­‐guarantee   Audit   programs.   GAO   Report  •  Increases  Fed  transparency    •  Directs  the  GAO  to  audit  the  Fed’s   Broad-­‐Based  Program   financial-­‐crisis  assistance  programs     Solvent   Good   Treas-­‐ Why  It’s  Flawed   Compan-­‐ collat-­‐ ury  Ap-­‐ ies   eral   proval  •  Should  be  conMnuous  GAO  Fed  audits    •  Transparency  increases  insufficient   given    Fed’s  increased  regulatory   Congress   authority  under  Dodd-­‐Frank  
  20. 20. Title  XII   What  It  Does  •  Authorizes  Treasury  to  develop   programs,  including  grants  to  banks,   Treasury   to  improve  low-­‐/  moderate-­‐income   individuals’  access  to  credit  •  Allows  for  government  –backed   reserves  for  CDFI  loans     Insured  depositories   Why  It’s  Flawed   CDFIs  •  Facilitates  direct  government   State,  local,  tribal  gov’t  enMMes   subsidizaMon  of  banking  services  and   Joint  ventures   underpricing  of  credit   Small  Dollar  Loans     Consumers  
  21. 21. Title  XIII   What  It  Does  •  Requires  proceeds  from  sales  of  GSE     obligaMons  and  securiMes  and  le-­‐ over  sMmulus  funds  to  go  to  Treasury  •  Reduces  size  of  TARP   TARP  •  Requires  FHFA  to  submit  report  to   $700  Billion   Congress  on  its  plans  with  respect  to   housing  finance     Why  It’s  Flawed   TARP  •  Masks  Dodd-­‐Frank’s  true  cost   $475  •  Didn’t  fully  end  TARP   Billion  •  Does  lihle  to  address  GSEs  
  22. 22. Title  XIV   What  It  Does   Ability  to  Pay   Establishes   Qualified  Mortgage  •  Requires  mortgages  to  be  consistent   Requirements  for   Mortgages   Safe  Harbor   with  borrowers’  ability  to  repay,   understandable,  and  not  unfair,   Requirements/   decepMve,  or  abusive   Rules  for  “High   Cost”  Mortgages   RestricMons    for   Mortgage  •  Establishes  “qualified  mortgage”     Originators  •  New  mortgage-­‐market  requirements   Mortgage  Servicing   Mortgage  Appraisal  •  Emergency  housing  aid  programs   Requirements   Requirements   Why  It’s  Flawed  •  Fails  to  fix  housing  finance   ProhibiMon  of   Certain  Mortgage   Taxpayer  Assistance  •  Increases  cost  of  mortgages   Terms   for  Homeowners  •  One-­‐size-­‐fits-­‐all  mortgage  market    •  Gives  regulators  power  to  pick   HUD  Office  of   Housing  Counseling   mortgage  products  for  consumers  
  23. 23. Title  XV   What  It  Does   NEW  SEC  DISCLOSURE  REQUIREMENTS  •  Requires  new  disclosures  by  resource   Resource  ExtracMon  Issuers  must   extracMon  companies   disclose  payments  to  foreign   governments    for  commercial  •  Requires  companies  to  publicly   development  of  oil,  natural  gas,   disclose  their  use  of  and  procedures   minerals   relate  to  conflict  minerals    •  Requires  SEC  disclosure  of  mine   SEC  reporMng  companies  for  which   safety  violaMons     conflict  minerals  are  necessary  to   funcMonality  or  producMon  must   try  to  determine  origin  of  minerals   Why  It’s  Flawed   &  file  conflict  minerals  report  •  Requires  SEC  to  regulate  beyond  its   experMse  and  distracts  SEC   SEC  reporMng  companies  that  own  •  Misuse  of  SEC  disclosure   mines  must  report  mine  safety  •  Costly,  anMcompeMMve  requirements   violaMons  
  24. 24. Title  XVI   Title  XVI   What  It  Does  •  Exempts  parMcular  derivaMves  from   secMon  1256  tax  treatment   TAX     Why  It’s  Flawed  •  Could  have  meaningful  revenue   implicaMons  for  the  United  States,   DERIVATIVES   although  the  nature  and  magnitude   of  those  implicaMons  remains  unclear   REVENUES    
  25. 25. What’s  on  the  Agenda  for  2013?  •  Many  Dodd-­‐Frank  rulemakings  underway  •  Changes  to  mortgage  market  as  CFPB  rules   take  effect  and  QRM  rule  is  finalized  •  DesignaMons  of  SIFIs  •  ConMnued  pressure  for  end  user  reform  in   derivaMves  as  margin  and  other  rules  for   swaps  go  final  •  Final  Volcker  Rule    
  26. 26. Challenges  Facing  Dodd-­‐Frank  Agencies  •  Sheer  volume  of  rulemaking  obligaMons  •  Balancing  Dodd-­‐Frank  rulemaking  with  other   rulemaking  obligaMons  and  day-­‐to-­‐day  operaMonal   funcMons  •  Puqng  regulaMons  in  place  that  comply  with  the   statute,  but  are  workable  •  Legal  challenges  based  on  ConsMtuMonal  deficiencies,   procedural  flaws,  economic  analysis  •  Validity  of  CFPB  Director  Cordray’s  recess  appointment   and  consequent  challenges  to  CFPB  rules  
  27. 27. What  Should  Keep  An  Eye  On  •  ConcentraMon  of  financial  system  •  Regulatory  inundaMon  and  regulaMons  serving  as   barriers  to  entry  •  Effect  on  investors,  consumers,  small  enMMes  •  Broad  regulatory  discreMon,  lihle  accountability  •  Lihle  economic  analysis  by  economic  regulators   and  no  aggregate  economic  analysis  •  Early  precedents  by  new  agencies  •  Effect  on  economic  growth  
  28. 28. CFTC  Dodd-­‐Frank  Rulemaking  by  Quarter  35  30  25  20  15  10   5   0   Source:  Commodity  Futures  Trading  Commission   Final  Rules   Produced  by:  Robert  Greene,  Mercatus  Center  at  George  Mason  University   Proposed  Rules   Advanced  NoMces  of  Proposed  Rulemaking  
  29. 29. Informal  Rulemaking  Also  Must  Be  Taken  Into  Account   Example:  73  CFTC  Guidance  Documents  in  2012   9   8   7  Number  of  Guidance  Documents   6   5   4   3   12   2   1   6 0   Source:  Commodity  Futures  Trading  Commission   Produced  by:  Robert  Greene,  Mercatus  Center  at  George  Mason  University