10 Years Of Dodd-Frank: Looking Back, And Ahead

By Christopher Dodd
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Law360 (July 20, 2020, 6:48 PM EDT) --
Christopher Dodd
Christopher Dodd
The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act was not inevitable, nor was the success of the reforms it mandated, which were heavily resisted by many in the banking industry. Little did we realize that the financial system would be tested again in such a short period of time from the financial crisis of 2008.

On the verge of the act's 10-year anniversary and amid tremendous stresses from the pandemic on the broader economy and inevitably on the financial system, now is a good time to take stock of lessons learned. 

Lessons Learned From the Act of Legislating Financial Reforms

The need for speed is critical.

It became evident quickly that the urgency my colleagues felt in legislating an immediate response to the crisis through enactment of the Emergency Economic Stabilization Act in October 2008, did not extend to addressing the underlying structural weaknesses that led to the crisis. Fatigue set in.

Other elements came into play including the partisan divide made worse by the dynamics of passing the Affordable Care Act. Opposition hardened against long-term reforms that shook up the status quo. And the simple passage of time made the crisis feel more remote and less threatening, leading to the political calculation that the public had moved on.

And yet Dodd-Frank was enacted less than two years after the near-collapse of the financial system in September 2008. The opportunity demanded by a crisis to make a difference is short lived. 

Legislators can't always get what they want, but where the need for reform is evident, failure to act is inexcusable.

Reforms put into motion in 2009 were designed to address underlying structural flaws in the regulation of the financial system that led to the collapse of industry giants, bail outs, the complete loss of trust in the most revered financial system in the world, and enormous human suffering manifest in the staggering loss of jobs, homes, retirement savings and wealth. Dodd-Frank embodies a series of compromises as to how best to create a resilient, safe, sound and fair financial system. 

Even when elusive, working to achieve bipartisan participation is important.

While Dodd-Frank was passed with only six Republican votes evenly divided between the U.S. House of Representatives and the U.S. Senate, the law reflects bipartisan ideas and amendments. Perhaps as important to me as the substance of the law was the openness and fairness of the process that resulted in its passage.

I welcomed, indeed courted, bipartisan contributions to the bill, recognizing the importance of getting buy-in from both sides of the aisle. Although not reflected in the lopsided vote on final passage, the contributions of members on both sides of the aisle helped to move the bill forward.

The U.S. is part of a community of nations, and where problems extend beyond our borders we should consider how our solutions fit into a global framework.

The financial crisis began in the U.S. but it didn't stop at our shores. Other countries had an interest in strengthening their own financial systems that were deeply affected by the U.S. crisis and lifting standards among nations to limit contagion.

Dodd-Frank built upon the principles the G-20 countries agreed to in November 2008, including enhancing sound regulation by strengthening regulatory regimes, prudential oversight and risk management and ensuring appropriate oversight of all financial markets, products and participants.

Those principles also include strengthening transparency and accountability by enhancing required disclosures on complex financial products, ensuring complete and accurate disclosure by firms of their financial condition, and aligning incentives to avoid excessive risk taking.[1]

These were principles negotiated and endorsed by the Bush administration. The pandemic graphically and painfully demonstrates the global nature of the crisis and the need to learn from and work with other countries to heal the planet. 

It is not possible to legislate confidence, but the quality of the mandated reforms and their implementation can restore it.

The lack of confidence in the U.S. financial system during the crisis was stunning. Consumers lost confidence in trusted institutions. Banks lost confidence in one another. Investors retreated and companies were valued at a fraction of their previous worth.

Legislative and regulatory measures that resulted in unprecedented levels of capital and liquidity in the banking system, and transparency and accountability where there was little, have made the U.S. financial system a model of strength and resiliency. 

Don't forget the victims.

Dodd-Frank created the Consumer Financial Protection Bureau to protect consumers from unsafe and unscrupulous financial practices, such as those at the heart of the financial crisis — abusive subprime mortgages.[2] While regulatory reforms were needed to strengthen institutions, they were also sorely needed to strengthen the hand of consumers of financial products and services.

But Dodd-Frank did not address the underlying structural inequities in our economy, those that resulted in the consumers most victimized by the financial crisis being disproportionately low income and minority individuals and communities. It is these same individuals and communities who are disproportionately succumbing to COVID-19.

This time, in the wake of the pandemic, Congress must confront head-on this fundamental unfairness that exists in our economy and victimizes entire swaths of our society over and over again.

Lessons Learned Since Dodd-Frank Was Enacted

The law provided sufficient flexibility for the regulators to act in the face of the latest crisis.

Title I mandated heightened capital, liquidity and risk management practices for the largest banks. It didn't mandate specific levels, as Congress should not dictate precise metrics in these areas. But the regulators who implemented these reforms post-crisis put into place demanding standards that are now well serving the banking industry and the American public.

Every banking regulator who recently appeared before the Senate Banking Committee attested to the strength of the banks and their ability to serve the public in this deeply troubled economy.[3]

The regulators today have relied on the record high levels of capital and liquidity, calling on the banks to deploy their resources to serve their customers and communities and giving banks some regulatory latitude to do so. This temporary easing of high capital and liquidity standards should be just that — temporary. The past 10 years have demonstrated that during prosperous times, the banks must be required to shore up their defenses for times like these. 

One controversial aspect of Dodd-Frank was its provisions to limit the Federal Reserve Board's emergency authorities under Section 13(3) of the Federal Reserve Act. [4]

Measures to tighten up the Federal Reserve's emergency lending authority were driven by my former Republican colleagues on the Senate Banking Committee to reduce moral hazard, in other words, the market's belief that the government would bail out failing companies and therefore would not hold companies accountable for bad behavior.

However, these limits have not appeared to hamper the Federal Reserve's recent initiatives to provide trillions of dollars in broad programmatic relief. Rather they have prevented another bail out of a single company like American International Group Inc.

The tools and authorities provided by Dodd-Frank could be better utilized.

The Financial Stability Oversight Council, was created for just such a time as the current pandemic. But, with its broad representation of regulators across the financial landscape, the FSOC should be deployed far earlier than in the midst of a crisis to identify emerging issues that may threaten financial stability.

As is evident from the pandemic, a crisis arising outside of the financial system can spill over into it. For instance, it doesn't take much imagination to contemplate how climate change could affect the banking system where the communities and businesses banks lend to are repeatedly ravaged by floods or fire, and crops are destroyed by chronic droughts. 

The Office of Financial Research, created by Dodd-Frank within the the U.S. Department of the Treasury to support the FSOC and keep a vigilant eye on potential threats to financial stability, should provide the data and tools to power the FSOC's work.

It should be monitoring our financial system with real-time data, using sophisticated data analytics and technology to model different threat scenarios. Given the reluctance of the FSOC agencies to share their information, the OFR should consider what type of alternative data may be available to help it fulfill its mission.

The CFPB must be the watchdog it was intended to be to ensure vulnerable homeowners and other consumers of financial products are protected and not scammed during and in the wake of this crisis. Now is the time to step up oversight and enforcement and let consumers know they have a watchdog on their side with teeth.

Dodd-Frank's failure to provide a more streamlined regulatory architecture may be hampering the development of much-needed innovation in financial services and regulation.

The draft bill I introduced in November 2009 would have established a single federal prudential banking regulator consistent with reform efforts previously floated for over 60 years to simplify our complicated system of financial regulators. The initiative proved to be a bridge too far for my colleagues, particularly in the face of deeply entrenched interests in retaining the status quo.

It is time to ask whether the complexity of myriad regulators is hindering beneficial innovation in the financial system by perpetuating uncertainty, a lack of standards, and fear of undertaking bold initiatives.

At stake is better and expanded access to financial services to underserved individuals, reduced burden on banks in regulatory compliance and supervision, and effective ways of fighting financial crime, and an end to forum shopping for the friendliest regulator. 

Conclusion

No law is cast in stone and immutable. Dodd-Frank was never meant to be the final word. Despite years of threats to repeal Dodd-Frank, fortunately for this country, those threats never materialized.

Congress did modify the law in 2018, but in doing so, validated its framework and its fundamental premise — to create a system of regulation designed to make the U.S. financial system safe, sound, resilient and fair in good times and when under stress, regardless of where that stress arises. Dodd-Frank has provided a good foundation.

It is still up to the regulators to responsibly execute their authorities and for Congress from time to time to improve upon it and learn lessons from its enactment and implementation. 



Christopher J. Dodd is senior counsel at Arnold & Porter. From 1981 to 2011, he served as a U.S. senator from Connecticut, during which time he co-authored the Dodd-Frank Act. From 1975 to 1981, he served in the U.S. House of Representatives.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] https://georgewbush-whitehouse.archives.gov/news/releases/2008/11/20081115-1.html. The G-20 agreed to implement specific reforms at a subsequent London Summit, April 2, 2009, pursuant to the Action Plan adopted in November 2008. (http://www.g20.utoronto.ca/2009/2009communique0402.html).

[2] Disappointingly, a recent 5-4 Supreme Court decision, Seila Law v. Consumer Financial Protection Bureau, found the governance structure of the agency to be unconstitutional, but recognized the significance of maintaining the agency. The Court fashioned the least disruptive remedy by allowing the single director structure to stand, but striking the for-cause removal provision. The likely outcome of this is that the agency head will change with administrations. Importantly, the decision leaves intact the powerful tools the agency has available to be a strong defender of consumer rights.

[3] Senate Banking Committee, Oversight of Financial Regulators, May 12, 2020.

[4] Dodd-Frank Wall Street Reform and Consumer Protection Act, Section 1101, Public Law 111-203.

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