After Dodd-Frank

When President Barack Obama signed the Wall Street Reform and Consumer Protection Act into law on July 21, 2010, he promised that “because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes.” Four years on, the implementation of Dodd-Frank has turned out to be more costly, lengthy, and complex than most proponents anticipated.

According to the law firm Davis Polk & Wardwell, regulators have completed only 52 percent of Dodd-Frank’s 398 rules to date. In time, the law will likely entail more than 25,000 pages of new regulations. At a two-day conference in July hosted jointly by the Cato Institute and the Mercatus Center at George Mason University, scholars and lawmakers came together to discuss the largest increase in bank regulation in history, as well as what lies ahead for the U.S. financial system.

John H. Cochrane opened the conference by noting that the “mountain of legislation” piling up as a result of Dodd-Frank is leading to “detailed microregulation.” Cochrane, a professor of finance at the University of Chicago Booth School of Business and an adjunct scholar at the Cato Institute, went on to explore the associated problems with this. Picking up on this insight, Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, added that Washington should not be the final arbiter of what is an acceptable risk. “Risk is an essential element of personal liberty and of market prosperity,” he said. “To take it away from the financial system is to take away the opportunity for success.”

In his keynote address, Richard Kovacevich, former chairman and CEO of Wells Fargo, pinpointed one of the key problems with Dodd-Frank. Only about 20 financial institutions — mostly investment banks and savings and loan associations — were at the center of the recent financial crisis, he said. Yet, from the beginning, the federal government attempted to address the problem indiscriminately. “These 20 failed in every respect, from business practices to ethics,” Kovacevich went on. “Yet 6,000 commercial banks are now being punished with Dodd-Frank penalties in the same way as those guilty parties.”

In a panel on the problems with the “too big to fail” policy, Andrew Olmem, former chief counsel and deputy staff director at the U.S. Senate Committee on Banking, discussed systemic risk not just from an economic perspective, but from a political one. “Many of the supporters of Dodd- Frank viewed banks not as private entities, but public utilities,” he said. In short, more regulation can lead to uniformity. “If systemic risk regulation means that every large institution starts to move toward the same product offerings, business models, and risk strategies, they all become susceptible to the same type of shock.”

Other speakers at the conference included Daniel M. Gallagher, commissioner of the U.S. Securities and Exchange Commission; Sharon Brown-Hruska, vice president of the National Economic Research Associates; and John Coates, professor of law and economics at Harvard Law School.

Four years ago, the Dodd-Frank Act set in motion some of the most significant changes to the financial services industry in history. Most of the details, however, have been left up to the same people who presided over the last financial crisis. During his luncheon address at the Cato Institute, Rep. Patrick McHenry (R-NC), chairman of the Oversight and Investigations Subcommittee of the House Financial Services Committee, ended by saying that it is conferences like this that provide the framework for what reform should look like. “And without that intellectual underpinning,” he added, “what we do on Capitol Hill is nothing but flying in the wind.”