The Red Tape That’s Choking Financial Reform

Interagency turf battles are delaying Dodd-Frank. It’s time for another overhaul


In Washington they call it being taken to the woodshed. That’s what happened when President Barack Obama summoned nine financial regulators to come in for a talk. The president wanted to know what’s taking them so long to write the rules needed to make sure the 2008 economic crisis won’t be repeated.

It’s been more than three years since the Dodd-Frank financial reform law passed. Yet less than 40 percent of the law’s requirements have been met.

One reason is the long list of agencies represented in Obama’s office: the U.S. Treasury, the Federal Reserve, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Securities and Exchange Commission.

Our head is spinning, too. Many of these have overlapping duties. And the leaders of all the agencies seem to have the natural impulse that drives bureaucracies: elbows-out protection of turf. The result is a lot of unnecessary delay.

Possibly the most important Dodd-Frank mandate still hanging is the Volcker Rule, which bars banks with federally guaranteed deposits from using their own funds when trading securities. Five agencies have a hand in writing it, and each has a veto. No wonder it’s a year behind schedule.

Also pending are important rules governing how Wall Street bundles mortgages into bonds for sale to investors, limits on the use of leverage by banks, and requirements for money to be set aside on certain derivatives trades. All require multi-agency agreement.

In 2009, Obama considered streamlining the system, including by collapsing four banking agencies into one and combining the SEC and CFTC. It made sense, and could have saved taxpayers a bundle. Sadly, he dismissed the idea because he wanted to avoid the territorial battles that would have erupted.

By choosing the expedient route, Obama may have baked in the very delays he hoped to avoid. The Volcker Rule deserves special attention in this regard. More than any regulation, it would address the too-big-to-fail issue by reducing the risks that the largest banks pose to taxpayers. But the banking agencies are at odds with each other and with the SEC over how to distinguish legitimate market-making (buying and selling securities on behalf of a client) and hedging — the two types of proprietary trading that the law allows — from high-risk speculative trading by large banks for their own profit.

With 60 percent of the Dodd-Frank act’s directives to come, it behooves the president to keep a fire under regulators’ feet. If he truly wants to see them hustle, he should invite Congress to work with him on a cost-saving, bureaucracy-slimming, financial agency overhaul.


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