On Monday, President Barack Obama summoned top financial regulators to the White House and told them to get busy finishing implementation of the 2010 Dodd-Frank financial reform law. Obama’s impatience is understandable. Dodd-Frank is the centerpiece of his efforts to prevent another financial meltdown like the one in 2008. Yet as of July 15, regulators have finalized only 158 of 398 rules called for in the legislation, according to a law firm, Davis Polk, that tracks the process.
Why the delay? First, there’s the sheer multiplicity of responsible federal agencies. A list of those represented at the president’s meeting includes the Federal Reserve, Securities and Exchange Commission, Federal Deposit Insurance Corp. and National Credit Union Administration. There was much talk of consolidating these turf-conscious bureaus at the time Congress was working on Dodd-Frank; the bill’s failure to do so looks more unfortunate with each passing day.
Yet Dodd-Frank presents genuinely difficult substantive issues that would have challenged the nimblest regulatory apparatus. Case in point: the Volcker Rule, the law’s command that federally insured banks no longer engage in securities trading on their own account. Though not a major cause of the 2008 crash, such “proprietary trading” is a potential source of instability. The rule’s namesake, former Federal Reserve chairman Paul Volcker, and others persuaded the framers of Dodd-Frank to limit commercial banks to taking deposits and making loans, leaving uninsured investment banks, hedge funds and private equity to handle riskier stuff with no expectation, implicit or otherwise, of a federal bailout.
Neat in theory, the Volcker Rule has proved hideously complex in rule-making practice.
A proposed Volcker Rule issued in October 2011 ran to 298 pages and included 350 questions for further public discussion. In congressional testimony on July 11, Federal Reserve governor Daniel K. Tarullo expressed the “hope and expectation” that a final version will be ready by year’s end.
If not, it might be time to go back to the drawing board, as former FDIC chairwoman Sheila Bair and Volcker have suggested. If regulators can’t write a proprietary trading definition that’s sufficiently fine-grained and administratively enforceable, perhaps they should draft a broad one, enforced by holding bank executives and boards personally accountable for compliance.
The Washington Post (Aug. 23)