Will (Should) Dodd-Frank Survive?

Abstract

Despite the fact that it grew out of a financial crisis, the Dodd-Frank Act was not the result of a bipartisan consensus. It received no Republican votes in the House of Representatives and only three Republican votes in the Senate. There are repeated statements by Republicans that they would like to repeal the act of they had the opportunity. One of the reasons for Republican opposition is the fact that the act seemed to be a regulatory overreach not warranted by the circumstances. There was a financial crisis, to be sure, but there were many indications that it was the result of U.S. government housing policies and not a lack of regulation. While repeal seems far-fetched at the moment, if the Republicans hold the House and take control of the Senate in 2012, significant modifications in the act are not out of the question. There are good reasons for substantial modification. The act authorizes a Financial Stability Oversight Council - an organization made up largely of the principal federal financial regulators - to designate certain companies as “systemically important” because their financial distress might cause instability in the U.S. economy. Once this designation is made, these companies are to be regulated and supervised by the Federal Reserve giving that agency enormous power over their capital, liquidity, leverage and activities, and setting up the possibility of a partnership between the Fed and the largest financial institutions in the U.S. In addition, because they have been designated as too big to fail, these companies will have advantages over smaller competitors in obtaining credit, and could drive smaller competitors out of business over time. The act’s restriction on proprietary trading will weaken banking organizations by depriving them of another source of revenue. Finally, the Consumer Financial Protection Bureau has been established in the Fed, but has been made independent of the Fed, the President and Congress, raising questions about its conformity with the normal constitutional scheme.