Dodd-Frank has softened blow of pandemic, its authors say

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WASHINGTON — The economic toll from the coronavirus pandemic has been mitigated by reforms enacted in the 2010 Dodd-Frank Act, but the current crisis bolsters the case for even stronger regulation in the future, supporters of the decade-old law said Tuesday.

The bill's primary authors, former and current regulators, and others gathered for a virtual event exploring the impact of Dodd-Frank on the eve of the landmark legislation's 10th anniversary.

With banks and other institutions holding key financial levers to help businesses navigate the pandemic, former Senate Banking Committee Chairman Chris Dodd and former House Financial Services Committee Chairman Barney Frank credited their law — passed in response to the 2008 financial crisis — with positioning the banking system as a stabilizing force.

If the 2010 reforms were not passed, "this crisis we are going through now would have been far worse,” said Dodd, now a senior counsel at Arnold & Porter, during the event hosted by the Brookings Institution.

If the 2010 reforms were not passed, "this crisis we are going through now would have been far worse,” said former Sen. Chris Dodd, D-Conn.
If the 2010 reforms were not passed, "this crisis we are going through now would have been far worse,” said former Sen. Chris Dodd, D-Conn.

Dodd cited the law's tougher capital and liquidity requirements, stress testing, and the creation of the Financial Stability Oversight Council as having proven valuable in the pandemic crisis. "You get down that long list of the provisions in the bill, I think we are in far better place,” he said.

Frank agreed that the key provisions of Dodd-Frank have withstood time.

“The bill itself has held up very well, under the Trump administration it has held up also surprisingly very well,” Frank said. “For all of the denunciations of the bill … in fact the economy, the banking system functioned very well.”

Still, other participants in the event warned about the effects of deregulatory moves by the Trump administration, and said the economic crisis resulting from the pandemic has revealed areas where Congress should go further than Dodd-Frank.

"When this immediate crisis is over … I think we should reflect on the lessons from the crisis. I personally think we need a new Dodd-Frank,” said former Federal Reserve Chair Janet Yellen. “We need to change the structure of FSOC and build up its powers to be able to deal more effectively with all of the problems that exist in the shadow banking sector."

Meanwhile, a former Trump administration official and Republican Senate Banking Committee staffer downplayed the importance of Dodd-Frank, saying that banks would have been put on stabler ground even if the reform law had not been enacted.

“Most of the capital and liquidity requirements and strengthening of the capital requirements of banks and other financial institutions would have happened regardless of Dodd-Frank,” said Andrew Olmem, who recently served as deputy director of President Trump’s National Economic Council. “The regulators were in the process of improving capital and liquidity requirements well before Dodd-Frank had been passed as well as market participants were requiring that.”

Olmem added that Treasury Department leadership, rather than the 2010 legislation, has helped the U.S. economy weather the current economic crisis.

“We were fortunate to have" then-Treasury Secretary Henry Paulson a decade ago, Olmem said. Paulson "drove a really important response to the crisis," and the current secretary, Steven Mnuchin, "has done the same thing here.”

But other participants said the positive effect of the law has been hard to deny.

Michael Barr, who served as assistant secretary for financial institutions at the Treasury Department in 2009 and 2010, noted that the capital and liquidity requirements enacted in the legislation and implemented by the Fed have made the financial system able to handle the economic fallout of the pandemic.

“The additional capital and liquidity, the approach to systemic risk that is required now at the Fed, which had led the Fed to impose surcharges, to engage in stress testing … I think all of those measures have made the system more resilient,” said Barr, a dean at the University of Michigan's Gerald R. Ford School of Public Policy.

Federal Reserve Gov. Lael Brainard said Dodd-Frank resulted in banks building stronger capital buffers and improving risk management.

"Those reforms were vital in positioning banks to respond to COVID," said Brainard, a former Obama Treasury official. "And they were able as a result, unlike the last financial crisis, to continue lending to households and businesses, to work with their customers who need assistance, and to intermediate financial transactions.”

In the decade since the law's enactment on July 21, 2010, the financial industry and GOP policymakers have attempted to roll back or repeal Dodd-Frank, culminating in a 2018 regulatory relief package that eased certain provisions.

And the Brookings event came one day after the Supreme Court struck down a key provision of Dodd-Frank that required presidents to find cause to justify firing the head of the Consumer Financial Protection Bureau.

Some have speculated that the decision might result in a legislative effort to provide a check on a CFPB director's power by creating a commission to govern the agency.

Yet Dodd noted that the decision only dealt with that for-cause provision while still allowing the consumer bureau to fulfill its mission.

“The idea of having these commissions I think frankly may have value in certain circumstances, but this was a better result I think for us,” Dodd said. “I am disappointed obviously over the decision by the court, but frankly the decision was a lot better than it could have been."

While Dodd-Frank’s safeguards have enabled the financial system to remain resilient in the coronavirus pandemic, Yellen warned about weakening capital requirements post-Dodd-Frank.

“Places where, for example, banks over $250 billion had diminished liquidity requirements, capital requirements … you could see cases where regulatory relief went beyond where appropriate tailoring would require,” Yellen said.

The 2018 reg relief legislation gave regulators discretion to determine whether banks between $100 billion and $250 billion of assets should be subject to greater regulatory scrutiny. Dodd-Frank initially required the Fed to subject banks with more than $50 billion of assets to enhanced supervision.

Brainard added that it is inappropriate to allow banks to pay dividends during the current pandemic. The Fed last week said it would limit banks’ dividend payments to the levels they paid out in the second quarter.

“Of course, these kinds of payouts raise the risk that banks will need to raise capital or curtail credit at a challenging time in the recovery,” Brainard said.

Yellen also warned that there are future risks to the financial system and the oversight council may be ill equipped to handle them.

“FSOC doesn’t really have any powers of its own to regulate activities that give rise to systemic risk," she said.

Yellen noted that the council's only real authority is to designate specific nonbank firms for banklike supervision by the Fed. But whether the central bank could crack down on activities across the financial spectrum is unclear, she added.

If leveraged lending posed "risks to the economy and the financial system, but aren’t major concerns with respect to safety and soundness at the banks, it’s not obvious to me that the Fed has an explicit mandate to do something,” Yellen said.

Dodd warned that climate change is a potential systemic risk that the U.S. should prepare accordingly.

“We know that not all of the threats will originate within the financial system,” Dodd said. “With COVID-19 we’ve seen that a health crisis can quickly spill over into the financial system. Right now another natural disaster is looming with serious, widespread consequences for our financial system, as I speak of climate change. Policymakers and regulators don’t need to wait until a catastrophic act is upon us. Now is the time to be laying the groundwork and thinking ahead.”

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