The Dodd-Frank financial reform law has mostly done what Congress and the Obama Administration intended when they enacted it four years ago.
It has enhanced consumer protection against abuses by credit-card companies, payday lenders, and debt collectors. It has lessened the likelihood that faltering money-market mutual funds might contribute to another recession such as the one that afflicted the nation and world starting in 2008.
On other issues, though, Dodd-Frank has yet to work. These include the law’s failure to reform the government-sponsored home lending agencies Fannie Mae and Freddie Mac, as well as private credit-rating agencies that gave high marks to bad securities sold by their clients.
On the chronically contentious issue of whether some financial institutions are — and should be — too big to fail, the law’s success has been incomplete. Dodd-Frank requires the largest American banks (as well as European banks that do a lot of business in this country) to submit plans in advance for winding down their operations in an orderly fashion if they are in imminent danger of failure.
Banks that don’t file acceptable “living wills” supposedly face tougher capital requirements and limits on their operations and expansion programs. Yet two years after the biggest banks filed their initial plans, federal regulators this month declared 11 of the living wills “unrealistic or inadequately supported.”
The Federal Deposit Insurance Corp. says the plans won’t work. Another approach is needed, the FDIC says, to ensure that some banks aren’t allowed to be, or become, too big to fail — and thus will have to be bailed out by Washington if they run into trouble. That’s a huge, if hidden, potential government subsidy of big banks that small banks likely wouldn’t get during a next crisis.
Yet the Federal Reserve is prepared to give the banks another year to strengthen their living wills — to do, that is, what they have failed to do so far. In the meantime, they can continue to take short-term speculative risks that will yield big rewards for themselves if they succeed, and potentially big losses for taxpayers if they don’t.
In some respects, Dodd-Frank has forced banks to strengthen their balance sheets and hold more capital. But the law’s toughest-sounding provisions aimed at the biggest banks are worthless if regulators don’t enforce them.
One of the 11 banks that flunked its living-will evaluation was Bank of America. But it may have more immediate concerns: This month, it offered to pay more than $16 billion to settle a dispute with the Justice Department over the sales of allegedly faulty mortgage-backed securities by two of its subsidiaries, Countrywide and Merrill Lynch.
Bank of America had taken over both companies at the government’s urging during the financial crisis. But it knew of the companies’ problems and thought it could turn a profit anyway. The bank evidently was willing to pay a high price to avoid the threat of even more expensive federal litigation.
The evidence of Dodd-Frank’s effects so far suggests that banks still need to do more to simplify their operations and keep leverage under control. If regulators can’t credibly convey the message that no bank is too big to fail, Congress and the White House must do so.