By Amy Leisinger, J.D.
In a hearing yesterday, the House Financial Services Committee discussed and heard testimony on whether, five years after the passage of the Dodd-Frank Act, the U.S. financial system is more stable than it was before the legislation. Despite mixed responses, the witnesses and committee members seemed to agree that the 2,000+ pages of the Act and its required regulatory changes did not, and possibly could not, address all pertinent issues.
Silvers testimony. According to testimony by AFL-CIO Director of Policy and Special Counsel Damon A. Silvers, the Dodd-Frank Act was a compromise, and, because it left a large number of questions to regulators, it has been vulnerable to the political forces. However, the Act gave regulators significant new powers and the discretion to use them, he said, and, while the U.S. financial system continues to suffer from structural problems, it is no longer as vulnerable to crisis as it once was. The Act includes measures to counter systemic risk and the issue of “too-big-to fail,” but their effectiveness depends on the willingness of financial regulators to properly implement it, according to Silvers. “Powers have not been used to anywhere near the extent they could to protect against another bailout of the banks by the public,” he explained.
The Dodd-Frank Act closed numerous loopholes in what was a “Swiss cheese system,” Silvers explained, which has resulted in greater resiliency and more transparency. However, the achievements face threats in the form of failed implementation and lack of preventing banks from becoming too big to fail. These issues need to be addressed to achieve increased stability, he concluded.
Calabria testimony. Mark A. Calabria, Ph.D., the director of Financial Regulation Studies at the Cato Institute, was unimpressed by Dodd-Frank’s efforts to increase stability. In his testimony, he noted that stating goals and purposes is not the same as achieving them. “[T]he alternative to Dodd-Frank was not “doing nothing,” Calabria said, and the urgency to address the crisis may have led to poor, even harmful, policy choices.
The financial crisis was driven largely by growth and failure in the property markets and their link to U.S. capital markets coupled with loose monetary policy and encouragement for high leverage, he explained. However, the main issue that drove the passage of the Dodd-Frank Act was the perception that certain large institutions enjoyed the backing of the federal government, according to Calabria, but the Act’s approach to ending TBTF without taxpayer or industry cost is basically optional. With errors of both “commission and omission,” Dodd-Frank has reduced financial stability, concentrating risks while leaving the primary causes of the financial crisis unaddressed, he opined.
Atkins testimony. Paul S. Atkins, CEO of Patomak Global Partners, LLC and former SEC Commissioner, took issue with the Act’s creation of the FSOC and the SIFI designation process, as well as the Volcker Rule and the impact on bond market liquidity and noted that costs associated with these changes are falling onto investors. He stated that the Volcker provisions of Dodd-Frank and the attendant regulations fail to address a key part of the financial crisis and, as implemented, may have serious consequences for investors, job creators, and the U.S. economy. He also faulted the Act for failing to address the “crazy quilt” of financial regulators and the need for coordination.
When asked by Committee Chairman Jeb Hensarling (R-Tex) about whether stability has actually decreased, Atkins suggested that forcing banks to back away from proprietary trading and restricting capital markets may actually have had a net negative effect. The focus of financial regulation should be on figuring who is being harmed and how it is happening, not on generalized assertions, he said.
Zywicki testimony. George Mason University Foundation Professor of Law Todd Zywicki concentrated his comments on the work of the Consumer Financial Protection Bureau (CFPB). The Dodd-Frank Act failed to make changes to increase consumer financial protection and, over time, has resulted in higher prices and reduced consumer choice, he said. Further, he continued, the CFPB continues to expand its power and promote its own interests, and curtailing consumer credit harms the average person. “[T]he overall impact of Dodd-Frank has been to slow our economic recovery, raise prices, reduce choice, and eliminate access to the financial mainstream for American families,” he opined.