Greenspan Says He Would Like to See Dodd-Frank Bank Law Repealedby
Former Fed chairman urges bank capital be raised to 20%-30%
‘Contagious default’ can still occur under law passed in 2010
Former Federal Reserve Chairman Alan Greenspan said sweeping post-crisis reforms of the U.S. financial system haven’t fixed the problem they were designed to tackle and should be scrapped, escalating his long-standing criticism of the 2010 Dodd-Frank Act.
“I don’t think this bill is working at all and I would like to see it repealed,” he told Bloomberg Television’s David Westin in an interview Thursday from Washington. “But I must admit that the politics are such that that is called wishful thinking.”
U.S. Treasury Secretary Jacob J. Lew, in separate remarks on Thursday, said Dodd-Frank had made the financial industry safer. “It would be a mistake to roll back the clock on these protections,” he said in testimony to Congress.
Greenspan’s hands-off approach while he helmed the U.S. central bank was blamed by many critics for fostering conditions that incubated the global financial crisis. While Greenspan said in 2008 that his free-market ideology shunning regulation was flawed, he has for years been skeptical of Dodd-Frank, enacted after the turmoil to make banks stronger and subject to better oversight.
The 90-year-old Greenspan argued in a 2011 opinion piece in the Financial Times that Dodd-Frank could be shelved if banks held larger cushions of capital, and repeated that view on Thursday.
Shrink the Banks
“I would actually go anywhere from 20 to 30 percent of assets for pure equity. I know everybody says that’s going to shrink the banking system,” he said. “It will to a certain extent. But the extent that it is, is for those loans you shouldn’t have made in the first place.”
Dodd-Frank, which raised required capital and liquidity levels, reduced leverage and subjected banks to so-called stress tests to measure their ability to weather shocks, is under fire in Congress. Republicans in the House of Representatives have advanced legislation that would scrap it, arguing the law has slowed the economy by strangling the financial services industry in red tape. The proposal isn’t expected to get a vote on the House floor, with many lawmakers leery of appearing to favor big banks ahead of the Nov. 8 election.
Former Treasury Secretary Lawrence Summers argued last week in a paper he co-authored that investors still viewed banks roughly as vulnerable now as before Dodd-Frank was put in place, judging from market-based barometers of risk on a range of U.S. and foreign banks. Summers, who was a top adviser to President Barack Obama when the law was passed, said he was surprised by that discovery but that it wasn’t a reason to regret the law, without which “the financial system today would be much more fragile.”
Greenspan said that his problem with Dodd-Frank was that it had not fixed the problem of cascading defaults, where the threat of a bank counterparty being unable to honor its obligations undermined confidence in the wider financial industry.
“What Dodd-Frank has left us with is a system in which contagious default can still occur, and if that is in fact still the case, it’s done nothing,” he said. “But if you have a high enough ratio of equity to assets, there is no way you get contagious defaults.”