4 reasons why full repeal is not the answer for Dodd-Frank Act – but revision is
by Bija Knowles
A report by CFO Magazine puts forward several arguments for revising some of the regulations that were introduced under the Dodd–Frank Wall Street Reform and Consumer Protection Act, which the Trump administration aims to repeal and replace with the Financial Choice Act. Revision is a more tempered and considered approach than repeal, considering that public opinion in the US is broadly in favour of some form of regulation of Wall St following the 2007-8 financial crisis. Here are some of the principal arguments put forward by the report for revising Dodd-Frank.
According to research conducted by the Pew Research Center in February 2017, roughly half (49 per cent) of Americans think that financial regulation should do more to regulate financial institutions and markets, while 42 per cent think that the government's regulation has gone too far. This is a surprisingly balanced split in public opinion of financial regulation, which also divides as expected along Republican and Democrat lines. However, Lauren Wright, lecturer at Princeton University, argues that landmark legislative programmes such as Dodd-Frank become “engrained in people's lives” and this also applies to business, which have adapted and made significant changes to comply with the regulations. The argument is, therefore, that the public broadly wants some form of financial regulation to protect them from another banking crisis and that the Dodd-Frank Act, which was hard-won and took several years to enact, has now been accepted by consumers and businesses.
Repeal should be selective and considered
Emre Carr, a director at Berkeley Research Group, argues that much of Dodd-Frank's regulations do not fulfil their original objectives, saying that it provided “the wrong solutions” to preventing the next financial crisis. He notes: “US financial regulators turned into micro-managers of financial services rather than facilitators of well-working capital markets,” and suggests that not all but the following regulations of the act should be repealed:
- new corporate disclosures on conflict minerals, resource extraction (already killed in Congress), and median CEO pay ratio;
- the risk-retention requirement for asset-backed securities (ABS);
- the Consumer Financial Protection Bureau;
- the Financial Stability Oversight Council (FSOC), the Office of Financial Research (OFR), and the “Systemically important financial institution” (SIFI) designation;
- electronic execution requirements for swaps.
Full repeal not the answer
Most contributors to the CFO Magazine report seem to agree that Dodd-Frank was an over-reaction to the problems that caused and arose during the financial crisis. Luke Zubrod, of Chatham Financial, argues that the law “identified many of the right solutions but excessively applied them”. But at the same time it didn't go far enough to tackle other issues. He states that full repeal is not the answer – but revisiting some aspects of it is needed. For example, the exemption from derivatives collateralisation requirements should apply more widely and should not exclude financial end users, such as pension funds, financial technology firms and infrastructure funds.
Cost of implementing rules
It seems that reform is the preferred solution for most – so long as it is in keeping with the bill's original goals, which were to protect both consumers and banks. One aspect ripe for reform according to Tyler Harrison, the founder of EfficientPlan, is the 'ability to repay' (ATR) regulation, which requires lenders (such as mortgage lenders) to measure a borrower’s ability to pay the interest and principal over the life of the loan, rather than just the lower rate introductory period. Harrison notes: “While the ATR is very important, and a step in the right direction, there isn’t enough guidance associated with it, which can pose difficulties for potential borrowers in procuring the funds they need.” The cost of implementing such rules is inhibiting lending to small businesses and consumers.
Click here to read the full report in CFO Magazine.
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