Reflecting on Dodd-Frank

This summer, the Dodd-Frank Wall Street Reform and Consumer Protection Act turned five. Enacted in response to the 2007-2008 financial crisis, the law was intended to totally overhaul our nation’s financial regulations. Blog.2015.11.30 _ Lehman Brothers V2Today, critics say the legislation has resulted in excessive regulations that have hurt small community banks and low-income borrowers. Supporters insist that Dodd-Frank has made the U.S. financial system safer through both consumer protection and collaboration among various federal agencies.

Recently, Wharton legal studies and business ethics professor and Todd Zywicki, a law professor at George Mason University and executive director of its Law and Economics Center, debated the record of Dodd-Frank and discussed the tasks ahead for lawmakers and regulators on the Knowledge@Wharton show.

As summarized on Knowledge@Wharton, Professor Zaring describes Dodd-Frank as “a work in progress that has made the financial system safer, limited the size and scope of the largest banks, and created a new system of oversight that is affecting the way they do business today.”

Professor Zywicki disagrees, noting, “If the purpose of Dodd-Frank was to permanently entrench too-big-to-fail [financial institutions], raise the cost of credit for consumers, reduce access to credit for consumers and spur a greater reliance on products like pawn shops and payday lending, then certainly Dodd-Frank achieved its purpose.” he said. “But to the extent that what Dodd-Frank intended to do was to eliminate too-big-to-fail [financial institutions], to make the system work better for consumers, to increase choice and competition, then Dodd-Frank by any measure is a miserable failure. Everything that has resulted from it is the exact opposite of what it was supposed to do.”

However, both agree that Congress passed the Dodd-Frank Act in too much of a hurry. Professor Zywicki goes so far as to say, “Instead of thinking about things that would work, Congress created a political document, a document created by internal politics [and] power battles between politicians.”

And, in another point of agreement, both professors agree that future legislation is needed to fix Dodd-Frank. While targeting banks termed too big to fail with the legislation, Dodd-Frank is actually holding many community and midsize banks hostage. These banks have been forced to conduct expensive stress testing and reporting.

There are already bills in Congress that would require regulators to carefully tailor rules to the different kinds of banks they supervise. Most of the presidential candidates also support a more flexible approach to regulation, one that aligns with the different business models and sizes of America’s more than six thousand banks.

As we move forward it is my sincere hope that Congress will be more methodical and not rush to judgment and pass legislation before reading it to learn what is in the legislation they passed. This is especially true when it comes to the debate on the fiduciary standard.  Stay tuned.

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