Friday, December 23, 2016
Author: David Schwartz J.D. CPA
As we mentioned last week it is premature to write the obituary for Dodd-Frank. Regulators have publicly recommitted themselves to seeing Dodd-Frank implemented fully. But regulators are not the only ones who would like to hold on to at least some aspects of the new regulatory landscape. Recently in speeches and congressional testimony, rather than calling for wholesale repeal, leaders of several of the largest banks and trade groups in the U.S. financial industry have advocated revision and refinement of the regulations under the Act, preserving what works while changing what does not.
Since the legislation was signed in 2010, banks and financial institutions have made sometimes drastic changes in their business models, risk profiles, and organizational and financial structures. They have also invested heavily in compliance technologies and personnel, and sunk millions in legal fees seeking interpretations of the limits of the rules. Having survived years of regulatory uncertainty, U.S. banks and financial institutions have adapted themselves to the new regulatory environment. As JP Morgan Chase’s CEO Jamie Dimon said on a December 6, 2016 Goldman Sachs US Financial Services Conference Call, the industry does not have the appetite to go completely back to the drawing board when it comes to financial regulation. But they do want regulators to take a look back at what is working and what is not. The expectation on both sides of the aisle when Dodd-Frank was signed into law in 2010 was that it was a work in progress. The legislation granted a great deal of discretion to rule-making bodies like the Fed, FDIC, SEC, CFTC, etc. And the expectation was that these rules would be revisited and recalibrated by these bodies once markets settled down once again.
"So, we don’t have to re-litigate and re-legislate it again. I mean, you have got to kind of make it done with and I can give you a whole bunch of things in there that you can debate about, you know what they are. I don’t have to make the long list of them, but it’s – and also the things it gave a lot of room to regulators to do what they want to do, I think that should be cut back a little bit. It should be more perspective and exact what they are to accomplish, why they are trying to accomplish it. Legislation is meant to do certain things. Regulation meant to do another. This kind of pushed what I would say lot of legislative ability on to the regulators and hopefully that will change a little bit."
Bank of America's Chief Executive Officer Brian Moynihan echoed those sentiments at that same Goldman Sachs event on December 6. When asked, Moynihan said that he did not favor repeal, but rather a rethinking of some of the regulations under the framework now that we have some experience with them. In particular, Mr. Moynihan said would like to see regulators revisit bank capital restrictions. He said that now that banks have met and exceeded these new regulatory hurdles, he would like to see capital restrictions eased.
In a press briefing on December 8, SIFMA’s CED Kenneth Bentsen called for a study of regulations on the books like that done in Europe by Jonathan Hill during his tenure as European Commissioner for Financial Stability, Financial Services and Capital Markets Union. Bentsen says that the US could learn much from the approach taken by EU regulators.
“They looked to see how all of these rules are working and whether they were working as they had been intended,” said Bentsen. “We’ve been saying the same thing in the US for the last several years. It would be good for regulators to stop and take a look. . . [The European Commission’s] intent was to include potential proposals where they might make modifications and recalibrations. There is nothing that precludes the Department of the Treasury or individual regulators to put out such a request for information. They’ve done it in other areas over the years and allow market participants, the public, and others to comment.”
In testimony on December 8, 2016 before a U.S. House committee, Mr. Robert Toomey, SIFMA’s Managing Director and Associate General Counsel, delivered a similar message to that of his colleague, Bentsen. It is time, Toomey said, "to assess the coherence of the existing framework, and the degree to which overlapping rules target the same risks. We are thus recommending an assessment of coherence and cumulative impacts, on a forward-looking basis, to identify cases where there may be unnecessary duplication or conflicts between specific regulatory requirements and broader policy goals.”
Also at the December 8 House hearing, Thomas C. Deas, Jr. of the U.S. Chamber of Commerce was fairly specific about what he would like to change about Dodd-Frank. Along with all of the other witnesses testifying that day, Mr. Deas strongly urged Congress to direct financial regulators to conduct a study of major regulatory initiatives for cumulative impacts on all financial institutions, their customers, and economic growth. Deas listed the Net Stable Funding Ratio and money market regulation as pieces of Dodd-Frank regulation that are having demonstratively negative, yet unintentional effects, on liquidity and capital formation, making markets less safe rather than safer.
Once again, banks and financial institutions have found themselves in the grips of regulatory uncertainty. They all seem to agree, however, that scrapping Dodd-Frank and starting over again is not an option. Reflection, fine tuning, and recalibration appear to be what they prefer. Bankers like certainty and have made their peace with the broad goals of Dodd-Frank. It is time, however, to deal with those devils in the details.