Happy Birthday, Dodd-Frank!
Three years ago yesterday, Barack Obama signed the Dodd–Frank Wall Street Reform and Consumer Protection Act, and the reviews are decidedly mixed.
USA Today has a column today by Ted Kaufman entitled Three Years Later, Dodd-Frank is a Failure. The column goes on to say: “Sadly, except for a recent promising development that may increase capital requirements for megabanks, after three years the Dodd-Frank Wall Street Reform Act has not delivered on its promise to fix the problems that caused the financial meltdown of 2008-2009.”
Meanwhile, on the other side of the fence, President Obama is celebrating the long-awaited confirmation of Richard Cordray to run the Consumer Financial Protection Bureau, an organization that owes its existence to Dodd-Frank.
In many respects, it’s too early to declare success or failure. Three years on, the post-Dodd-Frank landscape is still taking shape, and it may be some time before the full impact of the reforms is known. Will the shift towards central clearing of derivatives reduce systemic risk or simply move it to a new breed of too-big-to-fail clearing houses? Will non-standard derivatives continue on as financial WMDs, untouched by the reforms? Will the finalization of regulatory details drag on indefinitely, creating confusion without solving the underlying problems that caused the crisis in the first place?
If nothing else, Dodd-Frank has pushed many banks to substantially improve the quality of their documentation and the depth of data they capture about various trading activities. These banks have better (and faster) visibility into risk than they did pre-crisis, and most have implemented better processes for ongoing risk management. The real question of Dodd-Frank’s success or failure may be whether it keeps the banks focused on the risks and data that matter, or distracts them with endless compliance red tape that adds no value. Time will tell.