The Economy by Peter R. Crabb: Unfinished Dodd-Frank business crimps economic recovery

Professor of finance and economics at Northwest Nazarene University in NampaJuly 23, 2013 

Happy Anniversary Dodd-Frank! Now that you are 3 years old, what do you plan to do?

The largest-ever regulatory overhaul of the financial sector in this country, The Dodd–Frank Wall Street Reform and Consumer Protection Act, was signed into law July 21, 2010. But three years later, much of this comprehensive law has yet to be implemented.

The 2,300-plus-page Dodd-Frank Act affects many types of financial institutions and involves many regulatory authorities.

According to data reported by Kevin McCoy at USA Today, only 38 percent of the law's 400-plus rules have been finalized as of June 4. Of all the required rules, 128 haven't even been proposed.

The law contains 90 provisions just for the Securities and Exchange Commission. As of July 15, the SEC has implemented only about three-quarters of these rules. For example, the law requires the SEC to rule on the definition of a "swap" and a "security-based swap agreement." The SEC is still taking public comments.

The uncertainty surrounding banking regulation as well as an uncertain direction for interest-rate policy from the Federal Reserve continue to discourage bank lending. Despite better conditions, policymakers are holding back growth, because the U.S. banking industry doesn't know the rules of the game.

Since Dodd-Frank became law, total loans and leases at U.S. commercial banks have grown about 4.5 percent, according to data from the Federal Deposit Insurance Corp. Banks are lending little more despite a 10 percent increase in deposits over the same period.

The Senate Banking, Housing and Urban Affairs Committee, of which Idaho Republican Sen. Mike Crapo is the ranking member, held hearings this month on the implementation of Dodd-Frank. Crapo and the committee wanted to know the status of Titles I and II, which pertain to bank capital requirements and new bankruptcy laws for "systemically important nonbank financial companies."

Again, there remains tremendous uncertainty over what banks and other financial companies are expected to do to comply with the law. Mary J. Miller, undersecretary of the U.S. Treasury, told Crapo's committee: "By the end of this year, we expect to approach the point of substantial completion of implementation of the Dodd-Frank Act."

It is not clear what Miller means by substantial, and she further testified: "Constant evolution in the financial system and the activities of financial institutions will require regulators to be flexible and ready to address new threats to the financial system." Some bankers could interpret that as meaning regulators will change the rules as we go along.

The banking industry is not really harmed by all this. The current rules allow banks to earn interest on excess deposit reserves or invest customers' deposits in risk-free government securities without using any of their own capital. Both actions allow the banks to make decent profits. Through the first quarter of this year, commercial banks in the U.S. earned 1.12 percent on their assets, up from just 1 percent a year earlier, according to FDIC data.

The harm from an uncertain regulatory and low-interest rate environment goes to households and businesses. Families saving more of their income to reduce risks in the future are penalized with low returns. Businesses trying to expand find it harder to get financing.

Let's hope policymakers and regulators can celebrate Dodd-Frank's third birthday by finalizing the rules and sticking with them. If that's not possible, just scrap the whole thing and let everyone get back to business.

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