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The Troubled Legacy of Dodd-Frank
It has been almost ten years since the financial crisis of 2008, which threw the financial system into turmoil with the collapse of Lehman Brothers. After two years of tumultuous debate, the legislative response to the meltdown was the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which imposed many restrictions on the operation of American financial institutions of all sizes and types. Dodd-Frank specifically targets “systemically important financial institutions,” or SIFIs, for an intensive barrage of regulations in order to avoid another “too big to fail” meltdown. A bank qualifies as a SIFI if it holds $50 billion in total assets, but, at the discretion of the Financial Stability Oversight Council, that designation could be extended to non-banks as well, such as MetLife, a well-established insurance company with a stable asset base. In 2016, District Court Judge Rosemary Collyer slapped down that practice in a bruising opinion.
The operation of Dodd-Frank has not stopped large banks from getting larger, in part because the bailout of one large bank was often achieved through its acquisition by an even larger one, as with the 2008 acquisition of the failed Washington Mutual by JP Morgan Chase. Indeed, now that banking reform is in the air, a recent study by the Federal Reserve Bank of New York reports that investors fear Dodd-Frank’s cumbersome and untested apparatus will fail in the next crisis.
The ongoing dissatisfaction with Dodd-Frank’s heavy regulatory burden spurred a reform movement to adopt Senate 2155, the Economic Growth, Regulatory Relief and Consumer Protection Act. Its key features are as follows. First, small banks, defined as having under $10 billion in assets, will be exempt from the so-called Volcker Rule, which bars commercial banks from engaging in speculative trades with their proprietary accounts, the sort that are said to have contributed to the 2008 liquidity crisis in financial markets. It also raises from $50 billion to $250 billion the threshold for the dreaded SIFI status and specifies tailored regimes for the oversight of the largest banks. Just recently, the movement gained steam with the passage in the Senate of a motion to end debate over the bill.
Who controls the past controls the future. — George Orwell, 1984
Yet another example of the unintended consequences of poorly-thought-out regulation has surfaced. Back in 2010, Senator Dick Durbin of Illinois added an amendment to the Dodd-Frank bill that capped the amount a bank could charge a retailer for a debit card transaction.
