Is a Rift Among Regulators Causing Dodd-Frank Delays?

There is no denying that the regulatory reforms of the Dodd-Frank Act are complex, politically divisive, and time consuming to craft. Nevertheless, foot-dragging and inter-agency squabbles among regulators are playing into the hands of critics trying to squash the regulations. 

Not all regulators are on the same page when it comes to deciding how the new rules should be implemented and the tension is starting to spill out into public forums as finger-pointing is becoming more common.

During a recent Banking Committee hearing, there was palpable tension when Sen. Jeff Merkley (D-OR), a co-author of Volcker Rule legislation, questioned Comptroller of the Currency Thomas Curry.

Afterwards, Merkley, in an interview with the Website Talking Points Memo, stepped up his attack. He said other regulators are “supportive of a much stronger Volcker Rule.” He blamed the Office of the Comptroller of the Currency for a delay in final rulemaking and hinted at tension among the agencies. “The five regulators … have to agree, and the OCC oversees the banks that actually have the problem and need the firewall,” he said.

During a June 19 keynote address before the Mutual Fund Directors in Washington, Commodity Futures Trading Commission Commissioner Bart Chilton took a public swipe at the SEC. “I have respect for my regulatory colleagues, but I've gotta say, they've moved so slow that I think we need to check their pulse on this one,” he jabbed. “In March, I suggested we consider using a provision of Dodd-Frank that shifts unresolved jurisdictional disputes to the FSOC if an agreement can't be found. We have been continually reassured we are going to consider this joint rule with the SEC ‘next month.' We've been told that each month since my agency approved limits. We were told it could happen last December and subsequently almost every month. I see no promise of movement from the SEC on this. We are two years into this new law, and position limits were supposed to be implemented after six months. The FSOC should resolve this.”

As of June 1, 2012, a total of 221 Dodd-Frank rulemaking requirement deadlines have passed, a report from the law firm of Davis Polk & Wardwell shows. Of these, 148 (67 percent) have been missed with only 73 (33 percent) met with finalized rules.

Things have gotten so bad that a new group has sprung up to attempt to break the rulemaking gridlock. Sheila Bair, former chairwoman of the Federal Deposit Insurance Corporation, is hopeful the Systemic Risk Council (SRC) she recently helped form and now heads will serve as a “bully pulpit” and prod plodding regulators off the sidelines.

The SRC—a private sector, volunteer group formed by the CFA Institute and The Pew Charitable Trusts—met for the first time June 18. Its membership includes such influential figures from the financial world as: Paul Volcker, former chairman of the Federal Reserve; Brooksley Born, former chairwoman of the Commodity Futures Trading Commission; Paul O'Neill, Treasury secretary under George W. Bush; and John Reed, former chairman and CEO of Citicorp and Citibank.

“Our overriding concern stems from the lack of progress made by the members of the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) to address several critical issues as mandated by the [Dodd-Frank Act],” a statement issued by the council says. “That concern increases each day that the implementation of systemic risk reform languishes. A sense of complacency has made reforms for effective oversight seem less urgent despite escalating problems elsewhere in the global financial system.”

“We just want to get the rules done. With lobbyists there is a calculated effort to drag it out as long as possible, so the rules get watered down and the public loses interest and becomes cynical about reform ever happening.”

—Sheila Bair,

Former Chairwoman,

Federal Deposit Insurance Corporation

The FSOC was established by the Dodd-Frank Act to identify risks and respond to emerging threats to financial stability in the financial system. The FSOC is made up of ten voting members, including the Secretary of the Treasury—currently Timothy Geithner—who chairs the committee, and the chairmen of the SEC, the Federal Reserve, the Federal Deposit Insurance Corp., and others.

The Council called the FSOC's lack of progress since mid-2010 “disappointing.”  Among the complaints: only seven of the FSOC's 10 voting members are confirmed agency heads; no non-banks have been designated as systemically important financial institutions; it has done little to coordinate, prioritize, and lead Dodd-Frank reforms to address systemic risk; it has not sufficiently coordinated with regulators outside the U.S.; and the problem of dealing with an even larger pool of potentially too-big-too-fail institutions has not yet been addressed.

“We just want to get the rules done,” Bair says. “With lobbyists there is a calculated effort to drag it out as long as possible, so the rules get watered down and the public loses interest and becomes cynical about reform ever happening. That's the strategy.”

“I think the process of writing the rules themselves has not been a good one,” she adds. “Congress created the FSOC to exercise leadership on systemic risk issues, to identify systemic risk, make sure we deal with it in a corrective way, and help facilitate the inter-agency rulemaking process. They need to be out there coordinating the rule writing, making sure they get done on time, and making sure that the individual agencies are consistent with what they adopt.”

Federal agencies are indeed hopelessly behind schedule on creating the rules to carry out Dodd-Frank.

RULEMAKING PROGRESS

The following four charts from DavisPolk show Dodd-Frank rulemaking progress by agency as of June 1, 2012:

Source: DavisPolk.

“They need to prioritize,” she says. “They need to make sure the rulemakings are cohesive and consistent, and they need to get them done.” Blair is calling for more cooperation among the agencies. “All their reputations are at stake here and they need to work together and make these decisions based on a public interest mandate,” she says.

“When you have inter-agency organizations there can be regulatory arbitrage,” says John Rogers, president and CEO of the CFA Institute and a council member. “Regardless of that, the mandate of the FSOC is very clear, has been outlined in law, and we need to get moving and keep the pace.”

Bair says that, as a regulator, she proposed that Congress create a systemic risk council that would be independently chaired by someone with a fixed term, similar to the way the Federal Reserve and FDIC operate. All too often, political independence is rare, she says.

“The Treasury Department and the Treasury Secretary are part of the administration and it is their job to support the policies and re-election prospects of their president,” she says. “They serve at his pleasure and they are part of his team. It does create a tension. It is difficult to wear both those hats when you are trying to chair a council that is composed of independent regulators, but you are also trying to be the good soldier for the President. That is a design weakness with the FSOC. Nonetheless, they need to exercise more leadership and get these rules done.”

What's Next

Bair says many of the most delayed rules are also among the most important. Among them is action on the Volcker Rule and its restrictions on proprietary trading by deposit-insured banks.

With a July deadline looming, advocates might have hoped that losses of at least a $3 billion from a bad derivatives trade by JPMorgan Chase would serve as a catalyst for action. Instead, during congressional testimony, CEO Jamie Dimon dismissed the proposed rule as “vague” and “unnecessary.” The debate over what financial strategies the Volcker Rule would, or wouldn't, put a stop to has since raged on.

“The fact remains they were using their excess deposits, which are insured by the government, to make these kinds of trades and these are very high-risk products,” Bair counters. “If they want to do that kind of thing they should not be doing it inside of an insured bank, they should have to go to the private market if that sort of high risk activity is something the private market wants to support … I don't even have to get to the Volcker Rule to know this wasn't something that was appropriate.”

Among the issues the council is demanding be addressed:

Acting immediately to propose and finalize rules that will “substantially strengthen both the quality and amount of capital that must be held by the nation's largest financial institutions.”

Activating a fully functioning OFR data collection and analytics system, including the integration of data collected by individual FSOC agencies and secure Senate confirmation of a director for the OFR.

Completing rules for greater oversight and transparency in the OTC derivatives market, including centralized clearing of and use of execution facilities for standardized contracts, margining and capital requirements, position limits, and “other measures necessary to “address harmful speculation and systemic contagion, including the credit derivatives markets.”

Focusing on international coordination of regulators, including the sharing of data, to ensure that global policymakers are aware of growing threats to financial stability.

Expediting rules for capital requirements, resolution planning, examination, and data collection for SIFIs.

“We don't have a good handle on what's happening in the shadow sector,” Bair says of the last item. “The regulators who are looking at this need to start making some decisions. Maybe it doesn't have to be a full-blown, bank-like regulatory regime; maybe it is just some basic capital and liquidity requirements. But if there are entities out there that can put the rest of us in peril and because of a failure would have systemic ramifications, they need to be designated.”