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Brookings Institution Event on Dodd-Frank

Brookings Institution

“A Decade of Dodd-Frank”

Tuesday, June 30, 2020

Key Topics & Takeaways

  • Both Dodd and Frank remain confident in the strength of the Dodd-Frank Act, saying that its provisions prepared the financial industry to be more capitalized and better supervised to weather the COVID-19 pandemic.
  • Various panelists stated that there are still many improvements that need to be made to protect the best interests of consumers.
  • The current financial crisis did not result from a systemic failure in the financial sector, so its behavior will differ from the 2008 crisis.

Opening Welcome

  • The Honorable Christopher Dodd, Former Chairman, U.S. Senate Banking Committee

Dodd commended the effort of many remarkable people who worked to pass the Dodd-Frank Act (Act) ten years ago. He said the Act delivered its promise to create a more transparent, accountable, and resilient financial system, and it also created a structure that allows the financial system to better weather a crisis and recover. He noted the “health and stability of the banking system is inextricably linked to the financial health of consumers and communities,” and there is still more to do to achieve a system that is fair and inclusive. He concluded that there are threats that originate inside and outside the financial system, and policy makers must lay the groundwork for future crises through a collective effort of many agencies, institutions, and political parties to find a widely durable and accepted solution.

Panel 1 – “What were the difficult choices of Dodd-Frank, and how do they perform today?”

  • Michael Barr, Joan and Sanford Weill Dean of Public Policy, University of Michigan
  • Amy Friend, Senior Advisor, FS Vector
  • Andrew Olmem, former Deputy Director, U.S. National Economic Council; former Deputy Assistant to the President, White House
  • James Segel, President, James Segel LLC

In the first panel, Barr outlined how Dodd-Frank protects the financial system in an economic crisis as a result of legislation designing regulatory system that is both resilient and absorbent of risk, and he noted that when looking at the bigger picture, consumer protection, derivatives reform, and safety in the system are strong wins. Olmem responded to the question of how Dodd-Frank faired during the current crisis and stated that strong leadership is more impactful compared to the provisions of Dodd-Frank, emphasizing the importance of having the right people in relevant positions at the right time. He minimized Dodd-Frank’s ability to respond, citing that the strengthening of the capital liquidity requirements of banks and financial institutions would have happened regardless, and Dodd-Frank has only made the financial system “more costly, more complex, and more fractured.” He did comment that the derivatives markets are more transparent and better capitalized.

Friend discussed the Financial Stability Oversight Council (FSOC) and noted the realization of a needed augmented authority, alongside the Fed, to spot systemic risks that threaten the financial system and address them. She commented that it was a controversial “mistake for the FSOC to curtail its own authority to designate systemically important institutions outside of the banking system” and Congress should have the authority to fashion a specific regime. Following the conversation on FSOC, Segel discussed the 13(3) debate within Dodd-Frank that preserves the Fed’s right of action to respond immediately and provides guidelines to the Federal Reserve’s power to lend money.

The conversation shifted to the Supreme Court Ruling on the Consumer Financial Protection Bureau (CFPB), and Olmem stated the decision of this ruling “comes back to the idea of accountability” because political figures responsible for making decisions for financial regulation going forward should have direct accountability. He noted that the decision “does remove the removal provision, but it does not change the term, and every President can have his or her own director if they decide to use this authority.” In response, Barr rebutted and noted that the CFPB is critical for making the financial system safe and fair. He noted the laws that were transferred to the CFPB were already in place, but the “Fed chose not to enforce them because of the conflict between safety and soundness, and they always deemed safety and soundness to prevail over consumer protection.” He concluded by stating “the issue is are we going to have strong consumer financial protection going forward or not?”

The conversation shifted to the idea of too big to fail, and Friend responded that “Americans should feel confident that the financial system is far more stable, transparent, resilient than it was ten years ago when Dodd-Frank passed.” She noted that the Act creates a very credible framework that makes large institutions less exposed, helps regulators understand the risks, allows for derivatives to be cleared and exchanged, and creates an orderly liquidation authority.

In conclusion, Olmem noted the “overall direction was unfortunately a big missed opportunity” for Dodd-Frank, and there is still a “very costly, complex, and fractured regulatory system that Dodd-Frank made worse.” He noted that discount window lending is one area that was not successfully addressed in the Act. As a result, banks are reluctant to use it, even though “the discount window should be the number one tool in a crisis” and “an active tool for policy makers going forward.”

Panel 2 – “Has Dodd-Frank reined in systemic risk?”

  • Lael Brainard, Member, Board of Governors of the Federal Reserve System
  • Dennis Kelleher, President and CEO, Better Markets
  • Jeremy Stein, Moise Y. Safra Professor of Economics, Harvard University
  • Janet L. Yellen, Distinguished Fellow in Residence, Economic Studies, The Hutchins Center on Fiscal and Monetary Policy

Solomon began the discussion by asking Brainard if she believes that Dodd-Frank has reined in systemic risk and what else the Federal Reserve can do to provide a stronger banking system. Brainard stated that as a result of Dodd-Frank, large banks have worked hard over the last decade to build capital and liquidity to improve their risk management, a trend that is currently helping banks respond to COVID while continuing to lend. Solomon then asked Yellen her opinion on Dodd-Frank increasing capital at banks and whether or not the US is moving in the right direction. Yellen answered that Dodd-Frank was very helpful and that it helped to make the banking system stronger and safer. She also said that there are places where Dodd-Frank went too far, specifically citing cases in which regulatory relief went beyond what appropriate tailoring would require. Solomon then asked for Stein’s views on this topic and he replied that he has concerns with stress testing. Stein explained that he does not like how stress testing is implemented and that it has become a compliance exercise resulting in the stress testing being ineffective.

Solomon then asked Kelleher for his opinion on why banks have capital and what happens when their capital runs out. Kelleher replied, stating that before the 2008 crisis banks continued their capital distributions and it is shocking that they were allowed to do that. He continued that when banks have more capital, they are more likely to be able to deal with the crisis and not rely on tax-payer bailouts. Kelleher referenced that there is a significant amount of uncertainty facing our banking system, but the Fed is still allowing banks to run out their capital. In response to a question regarding lack of regulatory progress in certain areas, Yellen replied saying that most of the problems, such as hedge funds, money market funds, and the increase in leveraged lending, were well known areas of risk before the pandemic and were dropped by the Trump Administration. Brainard added that you cannot predict shocks and Dodd-Frank was more focused on making the financial system more resilient.

Solomon then asked Stein about f-stock utility. Stein responded that while you can criticize f-stock and the SEC with a mind towards improvement, this kind of regulation is imperfect. Kelleher added that the job of regulators is to protect the banking system and that f-stock is not perfect, but it is the best that could be done at the time.

Solomon concluded the panel by asking for Brainard’s recommendations to curtail risk and make the financial system more resilient. Brainard stated that after the pandemic, there should be a review of what still needs to be done in terms of financial reform. In addition, regulators need to do what might not be popular to prepare for risks that are not normally anticipated. Solomon then posed a similar question to Yellen, who replied that we need to reform and create a new Dodd-Frank at the end of this pandemic .

Panel 3 – “How has Dodd-Frank performed for the consumer?”

  • Mehrsa Baradaran, Professor of Law, UC-Irvine
  • Richard Cordray, Former Director, Consumer Financial Protection Bureau
  • Lisa Donner, Executive Director, Americans for Financial Reform
  • Camden Fine, President & CEO, Calvert Advisors

Stewart began the discussion by asking the panelists for their opinions on the recent supreme court decision that allows the president to fire the head of the CFPB. Cordray and Fine both outlined that it was inevitable and that this decision showed that the Bureau is constitutional due to validation from the Supreme Court. Following up on this question, Donner expressed her belief that the current head of the Bureau should be fired in January 2020 if Biden is elected president. Fine expressed concern as a new head every four to eight years could create a lot of inconsistency, but Donner argued that the most important goal of the Bureau is to stand up for public interest, not consistency.

Stewart then turned to a discussion of how the CFPB can respond to the racial wealth gap. Baradaran replied that most agencies have not taken the racial wealth gap seriously, and the few that have tried have failed. She explained that there are broad structural issues that cause racial gaps in both banking and in how credit is loaned. Baradaran continued that this can be seen in how COVID has disproportionally impacted black communities compared to white communities. She concluded that black communities that suffered during the 2008 crisis never fully recovered and regained their wealth.

Cordray then stated that we have just entered a very fast recession, and this is why we have had foreclosures and forbearances. He explained that we need a consumer agency which is focused on protecting consumers and helping people who are behind on paying off their debt. Fine stated that when the administrations changed in 2017, the CFPB went from a proactive Bureau to a reactive Bureau, continuing that there has to be a balance during times like this pandemic. Donner said that in this moment of crisis, the Bureau should be collecting data to see what is happening and hold companies responsible for compliance with consumer protection laws. As a follow up, Stewart asked if states are the best hope for consumer protection. Cordray replied that in terms of pay day lending, it has always been the states trying to regulate it.

Stewart asked if consumer protection will ever be apolitical. Fine outlined his belief that eventually certain industries will cease to be political. Donner countered with a statement by saying that she believes the goal should be to make the system work better for consumers and if controversy is needed for that goal to be achieved, then partisanship is okay.

Cordray concluded that the Bureau has received a record number of consumer complaints during the pandemic, and that he wants to see the CFPB act in response. Donner said that she believes we need to return to the arbitration rule and continue the work to address inequalities in the economy. In addition, she stated that we need a whole new regime of rules to protect people’s privacy and data. Baradaran said that despite the fact that it is very difficult to regulate the pay day sector, it is still possible and still needs to be done. Fine concluded this panel stating that all stakeholders need to come together and look at how we regulate financial services.

Keynote

  • Christopher Dodd, former Senator (D-Conn), U.S. Senate; former Chairman, U.S. Senate Banking Committee
  • Barney Frank, former Congressman (D-MA), U.S. House of Representatives; former Chairman, U.S. House Financial Services Committee

Both Dodd and Frank agreed that the Dodd–Frank Wall Street Reform and Consumer Protection Act has held up considerably well under both the Obama and Trump Administrations. Dodd pointed to past testimony from financial institutions before the House Financial Services Committee in which they said they are “healthier, more secure, and more profitable [since the enactment of Dodd-Frank].” Dodd said that the COVID-19 pandemic would have had a worse effect on the financial services industry had the legislation not been passed. They continued that banks are more stable due to the legislation which has in turn made them more capitalized and better supervised.

Dodd said that we “probably need a new Dodd-Frank type bill because of evolving technology and new concepts and ideas that have emerged.” Additionally, Dodd said that new legislation should, “tighten up the risk-based compensation which is inherently problematic because it encourages short term gain over long term kind of thoughts. Also, the FSOC should be strengthened because it has great value.” Frank said that new legislation should, “tighten the risk retention rule. A major cause of the problem was the ability to get rid of any of the risk when you’re securitizing, I would toughen that and put some percentage back to home mortgages.”

Frank advocated for “a mechanism whereby people can pay a fee that makes it self-financing so that they can be insured against interest rate risk on 30-year mortgages.” Additionally, Frank noted that, “subprime mortgage provisions in Dodd-Frank have worked very well over the past decade.”

Both Dodd and Frank agreed that racial inequality should be addressed immediately. Frank stated that current proposals in Congress focus too much on wealth redistribution as opposed to growth opportunities. While he supports redistribution, he noted that it is not as politically popular as some lawmakers believe. Frank said that, “The double crisis of the virus and racial issues has given us broader acceptance of the need to deal with both economic and racial equality.” Dodd elaborated on Frank’s position, saying “the great economic problem is inequality within the system. We have exacerbated the problem with access to higher education, student loans, etc.”

Panel 4 – “How has Dodd-Frank shaped the response to the current financial crisis, and is it prepared for the next?”

  • Austan Goolsbee, Robert P. Gwinn Professor of Economics, University of Chicago Booth School of Business
  • Aaron Klein, Fellow, Economic Studies; Policy Director, Center on Regulation and Markets
  • Margaret Tahyar, Partner, Davis Polk & Wardwell
  • Charles Yi, Partner, Arnold & Porter

The fourth panel discussed the effects of Dodd-Frank on the current financial crisis and its potential impact on future events. The first topic focused on the Federal Reserve and its role dealing with financial crises. Goolsbee stated he believes Dodd-Frank provided the Federal Reserve with a good balance of power. He pointed out that the current financial crisis is different than the one that occurred in 2008 as the current crisis did not result from a systemic issue within the financial sector. Instead, it was a consequence of a global health pandemic that ultimately impacted the economy.

The panel continued discussion of the Fed’s recent actions, such as buying company bonds, and whether these actions are in line with Congress’ intent under section 13.3 of Dodd-Frank. Klein stated that Congress has been inconsistent between 2008 and today, highlighting that they restricted the Federal Reserve’s authority yet asked for a bailout. Yi utilized this example to demonstrate the limits on Congressional power. He pointed out that if there is no “buy-in from the executive,” the laws being written simply do not matter. Goolsbee put forth the possibility that the Federal Reserve was handed this authority to allow Congress to avoid shouldering the blame being placed on them for any issues that occur.

The conversation then shifted to a discussion about liquidity rules. Klein argued that if the Fed had followed the law that required them to promulgate rules on subprime mortgages, the 2008 crisis may have been avoided. He proposed setting a deadline of sixty days on rule promulgation and providing FSOC the ability to step in if the sixty-day deadline passed without action. Tahyar pointed out that the courts have not historically held in favor of setting agency deadlines. Goolsbee concluded this topic by illustrating two themes proven again in this crisis: the Fed needs to be the centerpiece of oversight and institutions need more capital.

Panel 5 – “Has Dodd-Frank reined in systemic risk?”

  • Gary Gensler, Professor of the Practice of Global Economics and Management, MIT Sloan School of Management; former Chairman, Commodity Futures Trading Commission
  • Donald Kohn, Robert V. Roosa Chair in International Economics, Senior Fellow, Economic Studies
  • Hester Peirce, Commissioner, Securities and Exchange Commission

The fifth panel discussed the implications of Dodd-Frank internationally. The first topic revolved around the Financial Stability Board (FSB). Kahn stated the FSB was one of the great things to come out of the 2008 crisis as it emphasizes coordination, cooperation, and consistency across jurisdictions. He added that within the banking markets, global regulators should maintain communications and attempt to line up their regulations. Peirce acknowledged that the FSB has been an important convening place for communicating with other regulators. Gensler emphasized the benefits of forming relationships before entering into times of crisis as knowing how other cultures or organizations function is extremely important.

A question arose regarding whether it matters if the U.S. moves slower in certain areas of regulation in comparison to other nations. Kahn stated that it matters if it makes the U.S. subject to financial instability, but not otherwise. Peirce highlighted the importance of regulatory humility and international consensus. She added that some heterogeneity is useful between nations or organizations.

Peirce further discussed the changing global dynamic. She stated that there have been some pushbacks by international regulators, but pointed out there cannot be a system where an international body sets a directive that either tells Congress how to legislate or instructs regulators to ignore laws set by Congress. She stated that the SEC is committed to having international relationships, but the cultivation of such relationships does not necessarily mean they take orders from other jurisdictions.

The panel concluded with a discussion of any potential impact as a result delaying the implementation of Basel III. Gensler argued that it may be a prudent trade-off as things will likely get worse before they get better. He said that there has been a tremendous injection of capital into the markets, so defaults have not been visible yet and that at some point in the future with over twenty million out of work, many will not be able to pay back their loans which will hurt the real estate and leverage loan markets. Gensler stated this may wash back into the banking system. Kahn outlined his hope that the Federal Reserve would come down harder on bank dividends, but postponing Basel III is okay. He encouraged banks to retain and use their capital as best they can for the time being.

For more information on this event, please click here.

For an archive of past SIFMA hearing coverage, please click here.