Views on improving the integrity of global capital markets
11 April 2011

Regulatory Reform — a Johnson-Bachus Solution to Dodd-Frank

Posted In: Uncategorized

If there ever was an uphill battle, efforts to institute proper financial regulatory reforms are mired in it. There are so many distractions and barriers, not just here in the U.S. but globally, that proper attention to shoring up weak oversight of financial services and markets is looking doomed. How can we focus on preventing the next systemic meltdown when we are still dealing with the last one?

For those of you who envisioned a relatively prompt and coordinated regulatory response to the financial Armageddon of 2008-09, adjust your expectations. Amid EU country bailouts, oil shocks, the costs of armed conflicts, governments at all levels facing budget impasses, and a financial market still propped up by government liquidity, Dodd-Frank looks like small potatoes. Add to this the fact that regulation of the financial services industry, by its nature, is complicated and often arcane. A subject that is difficult to deal with, even in the calmest of times.

As if the pressing issues competing for policy makers’ attention weren’t enough, the regulatory reform effort in the U.S. has had to contend with several overt blows to its progress: starved SEC funding, legislative declaration that all or parts of the Dodd-Frank Act will be repealed, and a ubiquitous commercial lobbying campaign against derivatives reform. There is yet another effort afoot to cast the regulatory reform process as moving too quickly. Various commercial and trade association interests are lamenting it is all too complex, that rule makers shouldn’t rush complicated reforms that could result in “unintended consequences” — the pervasive new Washington catch phrase.

Here is an idea. Dodd-Frank is way too complicated. The voluminous studies and rule makings are over the top in normal times, much less today, as we continue digging ourselves out of an economic crisis. Let’s start by carving out the 3 or 4 things that should have been addressed straightaway but are now held prisoner in 2,600 pages of political compromise.

CFA Institute asked for just such an approach from the chief architects of U.S. financial reform: former Senate Banking Committee Chairman Christopher Dodd and the ex-chairman of the House Financial Services Committee, Barney Frank. Honestly address systemic risk, over-the counter (OTC) derivatives, and SEC resources, we urged, and 90 percent of what is needed will be accomplished. Throw in a properly scaled wind down of Fannie and Freddie and the goals of preventing another epic systemic meltdown will largely be met, we stressed.

But that is not the way it works, we were told. Maybe Dodd and Frank’s successors, Sen. Tim Johnson and Rep. Spencer Bachus, could change that. 

About the Author(s)
Kurt Schacht, JD, CFA

Kurt Schacht, JD, CFA, is the Senior Head, Advocacy Advisor, Capital Markets Policy at CFA Institute, where he oversees advocacy efforts and the development, maintenance, and promotion of the highest ethical standards of practice for the global investment management industry.

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