AEI Event on Dodd -Frank Anniversary
American Enterprise Institute (AEI)
Dodd-Frank’s Unhappy Fifth Birthday
Tuesday, July 21, 2015
Key Topics & Takeaways
- Too Big To Fail: AEI’s Wallison criticized the belief that all large financial firms are “interconnected” and that the failure of one leads to an inevitable failure of the rest. Following this logic, he said, the decision for the Financial Stability Oversight Council (FSOC) to label some institutions as systemically important financial institutions (SIFIs) is unnecessary, if not harmful.
- Volcker Rule: Bloomberg’s Iacovella spoke about the Volcker Rule, emphasizing that the changes in the structure of the capital market can be interpreted as “micromanaging” of trade behavior. He raised the question of whether one can distinguish proprietary trading from normal trading. This confusion, he mentioned, leads to a general “pull back” from trading and impacts liquidity.
- Risk in Financial Markets: Risk, Rep. Hensarling (R-Texas) said, is a “central element” of personal liberty and the capital markets as a whole. “If we ever lose our ability to fail in America,” he advised, “we will lose our ability to succeed.”
- Anemic Recovery: Owing to Dodd-Frank, Hensarling said, the U.S. is facing an “anemic recovery,” citing that under better recovery conditions middle income families would have $12000 more per family and 1.6 million Americans would have escaped poverty.
- Consumer Financial Protection Bureau: The CFPB, Hensarling said, possesses an “unbridled” power to increase costs and take away consumer access to everything from credit card to automobile loans, while FSOC may “unilaterally” define and dictate product designations, complete with the power to break up entities as well.
Speakers
- Alex J. Pollock, Resident Fellow, AEI
- Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, AEI
- Chris Iacovella, Senior Director, Global Government Affairs, Strategy & Public Policy, Bloomberg LP
- J.W. Verret, Assistant Professor of Law, George Mason University
- Mark Calabria, Director of Financial Regulation Studies, Cato Institute
- Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee
Introduction
Alex J. Pollock, Senior Fellow, AEI
Alex Pollock noted that often after financial crises there is a political and regulatory “overreaction,” and cited the Dodd-Frank Consumer Protection and Wall Street Reform Act (2010) as one such example which is now celebrating its “unhappy” fifth birthday.
Remarks
Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, AEI
Peter Wallison began the panel with a brief overview of the Dodd-Frank Act, explaining that while many believe that the financial crisis was caused by inefficient regulation of Wall Street, the government’s housing and mortgage policy caused it. He says that by 2008, 76 percent of the subprime/risky loans were in the books of government agencies, mainly Fannie Mae and Freddie Mac.
He continued that the subsequent collapse of the “bubble” that caused these organizations to become insolvent could have been most effectively resolved by reform of the government’s housing policy. However, Wallison said, the Obama administration opted to “punish” the financial sector with the introduction of the Dodd-Frank Act, which only exacerbated the situation.
He then explained that recent academic work reveals that recovery has historically been faster when it follows a financial crisis, with the exception of the Great Depression and the Savings and Loan collapse of 1989-1991, when new regulations were imposed. He emphasized that the Dodd-Frank Act, like its predecessors, is “destructive” and “impedes economic growth,” and that recovery would have been faster without such strict control.
Wallison criticized the belief that all large financial firms are “interconnected” and that the failure of one leads to an inevitable failure of the rest. He continued that, following this logic, the decision for the Financial Stability Oversight Council (FSOC) to label certain institutions as systemically important financial institutions (SIFIs) is unnecessary, if not harmful for the economy’s growth.
Wallison also explained that applying “single point of entry (SPOE), to the top 12 largest banks would not result in the holding companies become solvent if the subsidiary company is wiped out. In such a case, he continued an acquisition of the failing bank by a healthy bank may be useful. Wallison noted that in his view, SPOE does not eliminate the problem of “Too Big to Fail” (TBTF).
Chris Iacovella, Senior Director, Global Government Affairs, Strategy & Public Policy, Bloomberg LP
Chris Iacovella spoke about the Volcker Rule and Title VII derivatives rule, emphasizing that the changes in the structure of the capital market can be interpreted as “micromanaging” of trade behavior. He raised the question of whether one can distinguish proprietary trading from normal trading, when banks can still execute trades or hedge risk for customers and often will try to pre-empt a customer’s request if the bank has a reasonable belief the customer will request a trade. This confusion, Iacovella mentioned, leads to a general “pull back” from trading and impacts liquidity, the very problem that the rules should avoid.
He noted that Title VII rules were “forced” and “rushed” and that they were created by those who do not understand the difference between equities and futures, and threaten to put an “end to the global banking model,” Iacovella explained that while some aspects of the regulations are beneficial (such as increased risk management and improved price discovery), the excessive implementation and compliance obligations can be damaging, especially for smaller companies.
J.W. Verret, Assistant Professor of Law, George Mason University
J.W. Verret discussed the designation of financial market utilities (FMUs), and raised concerns over the role of the Federal Reserve (“Fed”). He also emphasized that the private sector can perform the Fed’s responsibilities with less cost.
Verret then continued to state that Title VIII is merely “activity based designation,” in which entities not meant to be caught by regulations, such as credit unions, are regulated in the same way as banks. Similarly, he compared Title IX to “a bag of junk”, as many rules unrelated to the financial crisis, yet damaging to the economy are included.
Verret continued to stress the need for change and innovation, suggesting elimination of the Williams Act or a switch to optional on certain regulatory reforms. He also stated that while the arbitration right currently exists, the Securities and Exchange Commission (SEC) ought to recognize it to make it effective. He noted that these recommendations, in combination to crowd funding, are the best alternatives to the Dodd-Frank Act.
Mark Calabria, Director of Financial Regulation Studies, Cato Institute
Mark Calabria’s key point was that Dodd-Frank has not ended bail outs, nor made markets any safer. He pointed out the concerns with Titles IX and X, concerning the role of the rating agencies and consumer protection. Calabria stated that rating agencies need to change, but also emphasized the need for institutions to continue careful management even when given a triple A rating. He clarified that the asset “bubble” came from credit being “too cheap,” as opposed to “too expensive.”
Calabria discussed the issue of funding the Consumer Financial Protection Bureau (“CFPB”) and stated that the Fed funding the CFPB is problematic, as the money could go to better use. He emphasized the issue of consumer privacy and data security, and the federal government’s irresponsible management of financial data.
Calabria concluded that a repeal of the Dodd-Frank Act is necessary and pointed out that its focus on expanding regulations for banks to everyone else ought to be reconsidered.
Panel Discussion and Audience Question & Answer
Wallison echoed concerns about the cost of executing derivative trades and the perception that bank hedging of risk looks a lot like proprietary trading under the Volcker Rule.
Iacovella noted that, in terms of Volcker, six different agencies were tasked with working on it which led to rules with “so many ambiguities and exceptions” that ultimately real damage will be caused to the “real” economy.
Calabria added that the pay ratio requirements are an “attack” not only on executive compensation but also on the everyday worker, as one way to improve the ratio is simply to hire fewer workers.
Too Big to Fail
An audience member asked the panel where to find data indicating institutions are still TBTF.
Calabria noted the difficulty in relying on political institutions to define TBTF, adding that the data is “suggestive at best.” Verret said that an additional complication is determining when bad actions of individuals should be attributed to the corporation, noting that many of the mistakes made by TBTF institutions in the run-up to the financial collapse were in accordance with former Federal Reserve Chairman Ben Bernacke’s persistent claims that the housing crisis was not happening.
Global Regulation
In response to an audience question as to what countries the regulators believed had reasonable regulations to not only encourage growth but also manage a potential crisis, Calabria and Iacovella both cited Switzerland and Canada as countries with solid regulatory foundations. Wallison added other countries outperform the U.S. in their housing market reliance, not just financial regulation.
Closing Remarks
Rep. Jeb Hensarling (R-Texas), Chair of the House Financial Services Committee
Rep. Jeb Hensarling noted the tendency for liberals to travel into “fact free zones” where “storytelling” replaces “truth telling” when talking about financial markets. He outlined the conservative principles of the American Founders, citing their respect for the “animal spirit” of “entrepreneurial risk taking” which is “regrettably” being tamed with the Dodd-Frank Act. As a result of this legislation, Hensarling said, society is “less stable,” “less prosperous,” and “less free” than ever before in the past.
Hensarling placed the origins of the crisis not in a lack of regulation, but in “dumb” regulation spurned by Washington which encouraged the creation of more and more housing loans to less-than-qualified consumers. The result of the crisis, he said, has been a regulatory overhaul which seeks to eliminate risk from the financial markets.
Hensarling stated that risk is a “central element” of personal liberty and the capital markets as a whole. “If we ever lose our ability to fail in America,” he advised, “we will lose our ability to succeed.”
The crisis, Hensarling charged, was caused not by greed on Wall Street, but instead greed in Washington, with Dodd-Frank representing the “epitome” of that greed.
Less Stable
Hensarling said that Dodd-Frank has made big banks bigger and small banks fewer, with a larger concentration of assets housed in fewer institutions that have been codified into law. He noted that Title I and Title II of Dodd-Frank, which govern SIFI designation and the Orderly Liquidation Authority (OLA), allow Wall Street banks to “stifle” competition and increase market share. Dodd-Frank has become, Hensarling said, a “self-fulfilling prophecy” where large banks are bigger and riskier than they would be otherwise.
Hensarling cited Titles VII and VIII, which manage derivatives and FMUs, as perpetuating the centralization of risk and placing it squarely on the taxpayer by requiring central clearing and providing FMUs access to the Federal Reserve discount window.
Hensarling turned to the Volcker Rule, which he deemed “confounding, confusing, and convoluted.” No bank failures during the crisis, he noted, were the result of proprietary trading and by enacting Volcker regulators addressed a problem that did not exist by creating a new one: illiquidity and market volatility.
Less Prosperous
Owing to Dodd-Frank, Hensarling said, the U.S. is facing an “anemic recovery,” citing that under better recovery conditions middle income families would have $12000 more per family and 1.6 million Americans would have escaped poverty. Instead, he continued, the higher regulated economy is failing low and middle income Americans, including “killing off” free checking which now only offered by 39 percent of community banks.
The CFPB, Hensarling noted, has played a key role, propagating a “salvo of consequences” that “cripple growth” and have “pernicious effects” on community banks. He continued that the community banking industry now loses one bank a day due to increased regulatory compliance fees.
Less Free
Economic and political freedoms have also been restricted by Dodd-Frank, Hensarling lamented, as the lives of Americans are less governed by rule of law and instead governed by regulators. He cited the CFPB and FSOC as two agencies that are completely out of public view and subject to no checks and balances.
The CFPB, Hensarling said, possesses an “unbridled” power to increase costs and take away consumer access to everything from credit cards to automobile loans, while FSOC may “unilaterally” define and dictate product designations, complete with the power to break up entities as well. Federal regulators have become “central planners,” he said, instead of regulators in their true form.
Closing
Free markets, Hensarling remarked, exist to provide consumers with the opportunity to rise in the future, while the federal government “smothers their achievement, imagination, and enterprise” with regulation, and the poor and middle class suffer. In the future, he said, boundless opportunity awaits, but only if Americans commit themselves to repealing Dodd-Frank today.
Question & Answer
Regulatory Reform
In response to an audience question about what the appropriate level of regulation in the financial markets should be, Hensarling compared regulation to the Goldilocks porridge scenario: while both too little and too much regulation can have drastic consequences for the economy, some regulation is necessary to allow credit to be properly allocated. He cited capital and leverage ratios as one area in which Congress can work for a common ground for regulatory simplification.
Looking Forward
An audience member asked what steps local banks can take to ameliorate the problems they are facing.
Hensarling responded that community bankers need to “hold on” because with five years of anecdotal evidence it should be easier to appeal to “reasonable” democratic minds to make progress going forward.
In response to an audience question about whether Congress is simply at an impasse in terms of legislating forward on Dodd-Frank, Hensarling noted that “hope springs eternal” and that he is patient that modest regulatory relief provisions can be achieved.
For more information on this meeting and to view an archived webcast, please click here.
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American Enterprise Institute (AEI)
Dodd-Frank’s Unhappy Fifth Birthday
Tuesday, July 21, 2015
Key Topics & Takeaways
- Too Big To Fail: AEI’s Wallison criticized the belief that all large financial firms are “interconnected” and that the failure of one leads to an inevitable failure of the rest. Following this logic, he said, the decision for the Financial Stability Oversight Council (FSOC) to label some institutions as systemically important financial institutions (SIFIs) is unnecessary, if not harmful.
- Volcker Rule: Bloomberg’s Iacovella spoke about the Volcker Rule, emphasizing that the changes in the structure of the capital market can be interpreted as “micromanaging” of trade behavior. He raised the question of whether one can distinguish proprietary trading from normal trading. This confusion, he mentioned, leads to a general “pull back” from trading and impacts liquidity.
- Risk in Financial Markets: Risk, Rep. Hensarling (R-Texas) said, is a “central element” of personal liberty and the capital markets as a whole. “If we ever lose our ability to fail in America,” he advised, “we will lose our ability to succeed.”
- Anemic Recovery: Owing to Dodd-Frank, Hensarling said, the U.S. is facing an “anemic recovery,” citing that under better recovery conditions middle income families would have $12000 more per family and 1.6 million Americans would have escaped poverty.
- Consumer Financial Protection Bureau: The CFPB, Hensarling said, possesses an “unbridled” power to increase costs and take away consumer access to everything from credit card to automobile loans, while FSOC may “unilaterally” define and dictate product designations, complete with the power to break up entities as well.
Speakers
- Alex J. Pollock, Resident Fellow, AEI
- Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, AEI
- Chris Iacovella, Senior Director, Global Government Affairs, Strategy & Public Policy, Bloomberg LP
- J.W. Verret, Assistant Professor of Law, George Mason University
- Mark Calabria, Director of Financial Regulation Studies, Cato Institute
- Rep. Jeb Hensarling (R-Texas), Chairman of the House Financial Services Committee
Introduction
Alex J. Pollock, Senior Fellow, AEI
Alex Pollock noted that often after financial crises there is a political and regulatory “overreaction,” and cited the Dodd-Frank Consumer Protection and Wall Street Reform Act (2010) as one such example which is now celebrating its “unhappy” fifth birthday.
Remarks
Peter J. Wallison, Arthur F. Burns Fellow in Financial Policy Studies, AEI
Peter Wallison began the panel with a brief overview of the Dodd-Frank Act, explaining that while many believe that the financial crisis was caused by inefficient regulation of Wall Street, the government’s housing and mortgage policy caused it. He says that by 2008, 76 percent of the subprime/risky loans were in the books of government agencies, mainly Fannie Mae and Freddie Mac.
He continued that the subsequent collapse of the “bubble” that caused these organizations to become insolvent could have been most effectively resolved by reform of the government’s housing policy. However, Wallison said, the Obama administration opted to “punish” the financial sector with the introduction of the Dodd-Frank Act, which only exacerbated the situation.
He then explained that recent academic work reveals that recovery has historically been faster when it follows a financial crisis, with the exception of the Great Depression and the Savings and Loan collapse of 1989-1991, when new regulations were imposed. He emphasized that the Dodd-Frank Act, like its predecessors, is “destructive” and “impedes economic growth,” and that recovery would have been faster without such strict control.
Wallison criticized the belief that all large financial firms are “interconnected” and that the failure of one leads to an inevitable failure of the rest. He continued that, following this logic, the decision for the Financial Stability Oversight Council (FSOC) to label certain institutions as systemically important financial institutions (SIFIs) is unnecessary, if not harmful for the economy’s growth.
Wallison also explained that applying “single point of entry (SPOE), to the top 12 largest banks would not result in the holding companies become solvent if the subsidiary company is wiped out. In such a case, he continued an acquisition of the failing bank by a healthy bank may be useful. Wallison noted that in his view, SPOE does not eliminate the problem of “Too Big to Fail” (TBTF).
Chris Iacovella, Senior Director, Global Government Affairs, Strategy & Public Policy, Bloomberg LP
Chris Iacovella spoke about the Volcker Rule and Title VII derivatives rule, emphasizing that the changes in the structure of the capital market can be interpreted as “micromanaging” of trade behavior. He raised the question of whether one can distinguish proprietary trading from normal trading, when banks can still execute trades or hedge risk for customers and often will try to pre-empt a customer’s request if the bank has a reasonable belief the customer will request a trade. This confusion, Iacovella mentioned, leads to a general “pull back” from trading and impacts liquidity, the very problem that the rules should avoid.
He noted that Title VII rules were “forced” and “rushed” and that they were created by those who do not understand the difference between equities and futures, and threaten to put an “end to the global banking model,” Iacovella explained that while some aspects of the regulations are beneficial (such as increased risk management and improved price discovery), the excessive implementation and compliance obligations can be damaging, especially for smaller companies.
J.W. Verret, Assistant Professor of Law, George Mason University
J.W. Verret discussed the designation of financial market utilities (FMUs), and raised concerns over the role of the Federal Reserve (“Fed”). He also emphasized that the private sector can perform the Fed’s responsibilities with less cost.
Verret then continued to state that Title VIII is merely “activity based designation,” in which entities not meant to be caught by regulations, such as credit unions, are regulated in the same way as banks. Similarly, he compared Title IX to “a bag of junk”, as many rules unrelated to the financial crisis, yet damaging to the economy are included.
Verret continued to stress the need for change and innovation, suggesting elimination of the Williams Act or a switch to optional on certain regulatory reforms. He also stated that while the arbitration right currently exists, the Securities and Exchange Commission (SEC) ought to recognize it to make it effective. He noted that these recommendations, in combination to crowd funding, are the best alternatives to the Dodd-Frank Act.
Mark Calabria, Director of Financial Regulation Studies, Cato Institute
Mark Calabria’s key point was that Dodd-Frank has not ended bail outs, nor made markets any safer. He pointed out the concerns with Titles IX and X, concerning the role of the rating agencies and consumer protection. Calabria stated that rating agencies need to change, but also emphasized the need for institutions to continue careful management even when given a triple A rating. He clarified that the asset “bubble” came from credit being “too cheap,” as opposed to “too expensive.”
Calabria discussed the issue of funding the Consumer Financial Protection Bureau (“CFPB”) and stated that the Fed funding the CFPB is problematic, as the money could go to better use. He emphasized the issue of consumer privacy and data security, and the federal government’s irresponsible management of financial data.
Calabria concluded that a repeal of the Dodd-Frank Act is necessary and pointed out that its focus on expanding regulations for banks to everyone else ought to be reconsidered.
Panel Discussion and Audience Question & Answer
Wallison echoed concerns about the cost of executing derivative trades and the perception that bank hedging of risk looks a lot like proprietary trading under the Volcker Rule.
Iacovella noted that, in terms of Volcker, six different agencies were tasked with working on it which led to rules with “so many ambiguities and exceptions” that ultimately real damage will be caused to the “real” economy.
Calabria added that the pay ratio requirements are an “attack” not only on executive compensation but also on the everyday worker, as one way to improve the ratio is simply to hire fewer workers.
Too Big to Fail
An audience member asked the panel where to find data indicating institutions are still TBTF.
Calabria noted the difficulty in relying on political institutions to define TBTF, adding that the data is “suggestive at best.” Verret said that an additional complication is determining when bad actions of individuals should be attributed to the corporation, noting that many of the mistakes made by TBTF institutions in the run-up to the financial collapse were in accordance with former Federal Reserve Chairman Ben Bernacke’s persistent claims that the housing crisis was not happening.
Global Regulation
In response to an audience question as to what countries the regulators believed had reasonable regulations to not only encourage growth but also manage a potential crisis, Calabria and Iacovella both cited Switzerland and Canada as countries with solid regulatory foundations. Wallison added other countries outperform the U.S. in their housing market reliance, not just financial regulation.
Closing Remarks
Rep. Jeb Hensarling (R-Texas), Chair of the House Financial Services Committee
Rep. Jeb Hensarling noted the tendency for liberals to travel into “fact free zones” where “storytelling” replaces “truth telling” when talking about financial markets. He outlined the conservative principles of the American Founders, citing their respect for the “animal spirit” of “entrepreneurial risk taking” which is “regrettably” being tamed with the Dodd-Frank Act. As a result of this legislation, Hensarling said, society is “less stable,” “less prosperous,” and “less free” than ever before in the past.
Hensarling placed the origins of the crisis not in a lack of regulation, but in “dumb” regulation spurned by Washington which encouraged the creation of more and more housing loans to less-than-qualified consumers. The result of the crisis, he said, has been a regulatory overhaul which seeks to eliminate risk from the financial markets.
Hensarling stated that risk is a “central element” of personal liberty and the capital markets as a whole. “If we ever lose our ability to fail in America,” he advised, “we will lose our ability to succeed.”
The crisis, Hensarling charged, was caused not by greed on Wall Street, but instead greed in Washington, with Dodd-Frank representing the “epitome” of that greed.
Less Stable
Hensarling said that Dodd-Frank has made big banks bigger and small banks fewer, with a larger concentration of assets housed in fewer institutions that have been codified into law. He noted that Title I and Title II of Dodd-Frank, which govern SIFI designation and the Orderly Liquidation Authority (OLA), allow Wall Street banks to “stifle” competition and increase market share. Dodd-Frank has become, Hensarling said, a “self-fulfilling prophecy” where large banks are bigger and riskier than they would be otherwise.
Hensarling cited Titles VII and VIII, which manage derivatives and FMUs, as perpetuating the centralization of risk and placing it squarely on the taxpayer by requiring central clearing and providing FMUs access to the Federal Reserve discount window.
Hensarling turned to the Volcker Rule, which he deemed “confounding, confusing, and convoluted.” No bank failures during the crisis, he noted, were the result of proprietary trading and by enacting Volcker regulators addressed a problem that did not exist by creating a new one: illiquidity and market volatility.
Less Prosperous
Owing to Dodd-Frank, Hensarling said, the U.S. is facing an “anemic recovery,” citing that under better recovery conditions middle income families would have $12000 more per family and 1.6 million Americans would have escaped poverty. Instead, he continued, the higher regulated economy is failing low and middle income Americans, including “killing off” free checking which now only offered by 39 percent of community banks.
The CFPB, Hensarling noted, has played a key role, propagating a “salvo of consequences” that “cripple growth” and have “pernicious effects” on community banks. He continued that the community banking industry now loses one bank a day due to increased regulatory compliance fees.
Less Free
Economic and political freedoms have also been restricted by Dodd-Frank, Hensarling lamented, as the lives of Americans are less governed by rule of law and instead governed by regulators. He cited the CFPB and FSOC as two agencies that are completely out of public view and subject to no checks and balances.
The CFPB, Hensarling said, possesses an “unbridled” power to increase costs and take away consumer access to everything from credit cards to automobile loans, while FSOC may “unilaterally” define and dictate product designations, complete with the power to break up entities as well. Federal regulators have become “central planners,” he said, instead of regulators in their true form.
Closing
Free markets, Hensarling remarked, exist to provide consumers with the opportunity to rise in the future, while the federal government “smothers their achievement, imagination, and enterprise” with regulation, and the poor and middle class suffer. In the future, he said, boundless opportunity awaits, but only if Americans commit themselves to repealing Dodd-Frank today.
Question & Answer
Regulatory Reform
In response to an audience question about what the appropriate level of regulation in the financial markets should be, Hensarling compared regulation to the Goldilocks porridge scenario: while both too little and too much regulation can have drastic consequences for the economy, some regulation is necessary to allow credit to be properly allocated. He cited capital and leverage ratios as one area in which Congress can work for a common ground for regulatory simplification.
Looking Forward
An audience member asked what steps local banks can take to ameliorate the problems they are facing.
Hensarling responded that community bankers need to “hold on” because with five years of anecdotal evidence it should be easier to appeal to “reasonable” democratic minds to make progress going forward.
In response to an audience question about whether Congress is simply at an impasse in terms of legislating forward on Dodd-Frank, Hensarling noted that “hope springs eternal” and that he is patient that modest regulatory relief provisions can be achieved.
For more information on this meeting and to view an archived webcast, please click here.