I will venture to prophesize that, just as the tax law did not lead to Minority Leader Pelosi’s “Armageddon,” so enactment of the Senate-passed finreg bill will not foretell financial crises as Sen. Warren portends. That there will be financial crises is a virtual certainty; that the legislation will spark them is extraordinarily unlikely. The bill simply doesn’t do enough to post-crisis reforms to make much of a difference. Indeed, to the extent the reforms reduce a bit of regulatory arbitrage, the risks of a financial crisis go down.
Taking S. 2155 as is, nothing core to post-crisis reforms was meaningfully eliminated. And, despite all the opprobrium Sen. Warren heaped on the very biggest U.S. banks, this goes double for GSIBs. Even with the substantive SLR relief for three large banks, GSIBs got squat.
Dodd-Frank’s signal achievement is in the Title II orderly-liquidation authority (OLA) framework to end too big to fail. Yes, OLA is still incomplete eight years later and yes, the FDIC has done far less than it should have to build it into a credible resolution regime. And, also yes, Treasury is right not only that the FDIC should now move quickly to make OLA credible, but also that Bankruptcy Code reform must proceed. And, cross-border resolutions are still a work in progress. TBTF thus is still possible unless or until OLA’s framework is finished and then fire-tested, but without it, what would we have? The answer is clear: TBTF expectations are far more likely to apply not to GSIBs, but to all the giant financial firms taking their place as new rules accelerate arbitrage-driven industry realignment.
Which brings me to Dodd-Frank’s second signal achievement: an attempt to ensure that non-banks with systemic clout are subject to the rules imposed on banks with like-kind consequence to financial stability. The Obama Administration failed quickly to implement the designation framework provided in the law and, when it did, it did so clumsily. It also relied far more on designation than on activity-and-practice systemic regulation, an alternative authorized in Dodd-Frank that would have been more effective had the Administration used more often. Still, as with OLA, Dodd-Frank made a difference and nothing in the Senate bill undoes it despite many GOP claims that FSOC does the devil’s work.
Dodd-Frank’s third most important pillar rests on the Bureau of Consumer Financial Protection and all the rules mandated for it. I’m no CFPB fan, but that’s more due to what the Bureau did under Richard Cordray than what it was supposed to do under the law. No matter where one stands on the agency, though, it’s clear that the Senate bill does nothing to it for all the harsh criticism heaped upon it by GOP Members of Congress and their President.
But, so much for a read of the bill and the law it amends. Policy might rest on it. Politics, not so much. With the hard Senate fight now behind reform advocates, a still more daunting struggle presents itself in conference. S. 2155 may not touch any of Dodd-Frank’s key achievements, but Rep. Hensarling is gunning for them. It won’t be the first time in recent Congressional battles that the ideological perfect defeats the pragmatic good.