If a \”law\” defines what actions can be punished by the state, the Dodd-Frank financial reform law–officially the Wall Street Reform and Consumer Protection Act of 2010–was not actually a \”law.\” Instead, the legislation told regulators to write rules in 398 areas.  In turn, there are laws that govern the writing of such rules, like specified time periods for comments and feedback and revision So it\’s not a huge surprise, four years later, that the rule-making is not yet completed.

Still, it\’s a bit disheartening to read the  the fourth-anniversary report published by the Davis Polk law firm, which has been tracking the 398 rule requirements in Dodd-Frank since is passage. The report notes: \”Of the 398 total rulemaking requirements, 208 (52.3%) have been met with finalized rules and rules have been proposed that would meet 94 (23.6%) more. Rules have not yet been proposed to meet 96 (24.1%) rulemaking requirements.\” For example, bank regulators were required by the law to write 135 rules, of which 70 are currently finalized. The Commodity Futures Trading Commission was to write 60 rules, of which 50 are finalized. The Securities and Exchange Commission was to write 95 rules, of which 42 are finalized. Various other agencies were responsible for 108 rules, of which 46 are finalized.

Well, at least 208 rules are completed, right? Not so fast. A completed rule doesn\’t mean that business has yet figured out how to actually comply with the rule. For example, there is a completed rule which requires that banking organizations with over $50 billion in assets write a \”living will,\” which is a set of plans that would specify how their business would be contracted and then shut down, without a need for government assistance, if that situation arose in a future financial crisis. The 11 banks wrote up their living wills, and the Federal Reserve and the Federal Deposit Insurance Corporation rejected the plans as inadequate. They wrote up second set of living wills, and a few days ago, the Federal Reserve and FDIC again rejected the plans as inadequate.

Maybe part of the problem is that the banks are dragging their feet. But another part of the problem is that writing a rule that in effect says, \”do a satisfactory living will,\” still leaves open many issues about what would actually be satisfactory. One suspects that if and when the next crisis hits, there will suddenly be a bunch of reasons why these \”living wills\” don\’t quite apply as written.

Or consider the issue of the credit rating agencies like Standard & Poor\’s, Moody\’s and Fitch, which were central to the financial crisis because it was their decision to give securities backed by subprime mortgages a AAA rating that let these securities be so readily issued and broadly held. (For earlier posts on the credit rating agencies, see  here and here.) Dodd-Frank requires the Securities and Exchange Commission to issue rules about credit rating agencies, but the rules are not yet issued.

Or what about the rules that if banks issue a mortgage and then sell it off to be turned into a financial security, the bank has to continue to own at least a portion of that mortgage, so that it has some skin in the game. Barney Frank, of Dodd-Frank fame, has said: “To me, the single most important part of the bill was risk retention.” A rule was written, but then multiple regulators have defined the rules so that almost every mortgage issued can be exempt from the risk retention regulations.

Or what about private equity? The SEC issued a rule about the fees of private equity firms, but now seems to be backing off the rule.

What about reform of Fannie Mae and Freddie Mac, the giant quasi-public corporations that helped put together the securities backed by subprime mortgage, and then went bankrupt and needed a bailout from the federal government? Not covered by Dodd-Frank. What about the \”shadow banking\” sector–that is, financial institutions that accept funds which can be pulled out in the short run, but make investments that cannot be quickly liquidated, thus setting the stage for a potential financial run. They were at the heart of the financial crisis in 2008, and they are  not covered by Dodd-Frank.  What about the asset management industry and exchange-traded funds that invest in bond markets, which the Economist magazine has just warned \”may spawn the next financial crisis\”? Not covered by Dodd-Frank.

I don\’t mean to be wholly negative here. The Dodd-Frank rules as implemented will require that financial firms hold a bigger cushion of capital (although perhaps not enough bigger). A number of rules promise to keep a closer eye on the largest firms, so that they are less likely to unexpectedly go astray. Some rules about having financial derivative contracts be traded in more standardized and open ways should be good for those markets. There are other examples.

But all in all, I fear that most people have reacted to Dodd-Frank as a sort of Rorschach test where the word \”financial regulation\” are flashed in front of your eyes. If you  look at those words and react by saying \”we need more financial regulation,\” then you are a Dodd-Frank fan. If you look at those words and shudder, you are a Dodd-Frank opponent. odd-Frank allowed a bunch of pro-regulation Congressmen to take a bow by passing it, and a bunch of anti-regulation Congressment to take a bow by opposing it. But for those of who try to live our lives as radical moderates, the issue isn\’t to be generically in favor of regulation or generically against it, but to try to look at  actual regulations and whether they are well-conceived. In that task, the Dodd-Frank legislation mostly used fairly generic language of good intentions, ducked hard decisions, and handed off the hot potato of how financial regulation should actually be written to others.

Morgan Ricks, a law professor at Vanderbilt who studies financial regulation, put it this way: \”There is a growing consensus that new financial reform legislation may be in order. The Dodd-Frank Act of 2010, while well-intended, is now widely viewed to be at best insufficient, at worst a costly misfire.\” The only sure thing about the next financial crisis, whenever it comes, is that it won\’t look like the previous one. The legacy of the Dodd-Frank legislation, as it grinds through the rule-making process, is at best a modest reduction in the risks of such a crisis and the need for government bailouts.

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