Too Many Cooks Is Reason for Financial Rule Delays
In Washington, they call it being taken to the woodshed. That’s what happened this week when President Barack Obama summoned nine financial regulators to come in for a talk. The president wanted to know what’s taking them so long to write the rules needed to make sure that the 2008 economic crisis won’t be repeated.
After all, it has been more than three years since the Dodd-Frank financial reform law passed. Yet less than 40 percent of the law’s requirements have been met.
One reason is the long list of agencies represented in Obama’s office: the U.S. Treasury, the Federal Reserve, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp., the National Credit Union Administration and the Securities and Exchange Commission.
Our head is spinning, too. Many of these have overlapping duties. And the leaders of all the agencies seem to have the natural impulse that drives bureaucracies: elbows-out protection of turf. The result is a lot of unnecessary delay.
Possibly the most important Dodd-Frank mandate still hanging is the Volcker rule, which bars banks with federally guaranteed deposits from using their own funds when trading securities. Five agencies have a hand in writing it, and each has a veto. No wonder it’s a year behind schedule.
Also pending are important rules governing how Wall Street bundles mortgages into bonds for sale to investors, limits on the use of leverage by banks, and requirements for money to be set aside on certain derivatives trades. All require multiple regulators’ cooperation and agreement.
Yes, Wall Street lobbying and reasonable differences over the finer points of policy explain some of the hang-ups. But so does the multiplicity of agencies involved. Take the patchwork of so-called prudential bank regulators -- the ones that protect consumer deposits by making sure banks have enough capital and otherwise operate in a safe and sound manner -- which is largely an accident of history. Broadly speaking, the comptroller of the currency oversees national banks, the Fed monitors bank holding companies, and the FDIC handles community banks, but some institutions must answer to them all. At times, a bank can have examiners from all three crawling over its books and records. And we aren’t even getting into state-level regulation.
In 2009, Obama considered streamlining the system, including by collapsing four banking agencies into one and combining the SEC and CFTC. It made sense, and could have saved taxpayers a bundle. Sadly, he dismissed the idea because he wanted to avoid the territorial battles that would have erupted on Capitol Hill and among the regulators.
By choosing the expedient route, Obama may have baked in the very delays he hoped to avoid.
The Volcker rule deserves special attention in this regard. More than any regulation, it would address the too-big-to-fail issue by reducing the risks that the largest banks pose to taxpayers. But the three banking agencies are at odds with one another and with the SEC over how to distinguish legitimate market-making (buying and selling securities on behalf of a client) and hedging -- the two types of proprietary trading that the law allows -- from high-risk speculative trading.
Another interagency skirmish is taking place among six regulators who have been drafting a qualified residential mortgage rule. It will dictate when lenders must keep some of the risk on their own books of the mortgages they originate and then sell to Wall Street. Similarly, the Department of Labor is in a pitched battle with the SEC over whether securities brokers should have the same fiduciary duty toward customers that investment advisers now must have.
But with 60 percent of the Dodd-Frank Act’s directives to come, it behooves the president to keep a fire under regulators’ feet. If he truly wants to see regulators hustle, he should invite Congress to work with him on a cost-saving, bureaucracy-slimming financial agency overhaul.
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