Bloomberg Businessweek published a fun graphic today trying to illustrate what’s in Dodd-Frank. Overall, it’s not bad. Because Congress decided to build off of the existing regulatory structure instead of tearing it down and building a new one, Dodd-Frank is tremendously complicated and almost impossible to understand for anyone who’s not a banker or Wall Street lawyer (and nearly impossible for many of those people too). Explaining it isn’t easy, and this chart hits most of Dodd-Frank’s main features while being is as accurate as you can hope when explaining an 800 page bill on financial regulatory reform to a lay audience. That said, there are a couple things that it gets wrong and a few pretty major provisions of Dodd-Frank left out that are definitely worth a mention.
Starting off with what the chart gets wrong, in the top right corner, it says, “A ‘living will’ provision requires you to spell out how you’d wind down if you go bust. That way customers won’t be left in the lurch.” The first part is right, but the purpose of living wills isn’t really to protect customers. (I’m not even sure who “customers” is supposed to refer to. A bank’s clients? Shareholders? Counterparties?) Living wills are designed so that if another Lehman fails, everyone’s not running around like chickens with their heads cut off because they have no idea what’s going on. That will benefit the failing bank itself (it will be better prepared to react to a crisis), regulators (they’ll be able to wind the bank down in as orderly a fashion as possible), other financial institutions (greater transparency for the market reduces the feared “domino effect” of the 2008 crisis), and, last but not least, taxpayers (who won’t be forced to bail out failing banks).
I should note that all of this assumes the best case scenario. The living will process is still very much ongoing, so all of these benefits are conditional on regulators getting the rules right and financial institutions implementing them properly, which will probably take some time.
There are two more little nits that I’d point out. The “Are you filthy rich?” circle points to a box which reads, “Starting in February, you’ll no longer be allowed to count the value of the house you live in to prove you’re rich enough to invest in hedge funds.” This is true (shout out to Sec. 413, “Adjusting the Accredited Investor Standard”!) but this isn’t meant to apply to the filthy rich. Rather, it’s supposed to stop those who aren’t filthy rich from investing in risky private funds. The threshold is now a net worth of $1,000,000, not counting the value of the person’s primary residence. Having a million dollar net worth isn’t poor by any means, but to qualify as “filthy rich” you’ve got to do a little better than that.
Lastly, the “too big to fail” box underneath the “Are you a big bank?” box, which I think is referring to all the new heightened regulatory requirements for systemically important financial institutions (SIFIs), doesn’t really have anything to do with derivatives. The increased capital standards for major swap dealers and the like are a whole different ball game (and actually have their own box on the chart).
With all that out of the way, there are a few things I’d add to the chart. The biggest one that’s missing is the FDIC’s shiny, brand-new Orderly Liquidation Authority. When a small, regional bank fails, the FDIC swoops in, packages it up, and sells it off to a nearby bank over the course of a weekend. Orderly Liquidation Authority is like that, except for Bank of America or Goldman Sachs or Citi. Needless to say, this is immensely more complicated because of the size and complexity of these institutions, as well as the international issues involved. No one really knows how this is going to work, but the FDIC and Fed are trying to figure it out right now. Let’s hope they get it right.
A couple other smaller things that aren’t as important but still worth mentioning:
- The chart mentions Legal Entity Identifiers, “a global corporate ID system,” but doesn’t name the agency charged with implementing this: the Treasury’s Office of Financial Research! The OFR’s job is to collect more data on what’s going on in the financial system, analyze the data, and provide it to regulators. To anti-Dodd-Frankers, this threatens the privacy of sensitive financial data while expanding government and wasting money, but to me it sounds like a great way to use data to help regulators do their job better.
- Dodd-Frank sets up whistleblower offices in both the CFTC and SEC. The SEC is apparently already overloaded with tips, probably by potential whistleblowers enticed by the promise of an award equal to between 10 and 30% of the resulting sanctions.
- There are a bunch of other regulations designed to prevent municipalities from getting their faces ripped off, like, for example, Jefferson County, Alabama.
- If I had to mention one mining-related provision of Dodd-Frank, I’d go with the section on Conflict Minerals Originating in the Democratic Republic of the Congo. Bloomberg chooses the next section on mining safety, but then I guess they’ve never seen Blood Diamond.
Aside from listing specific provisions of Dodd-Frank, there are a few broader points that I think are equally important in understanding what’s happening with the bill. First, financial regulatory reform is by no means a done deal. Republicans may not have been able to stop it from being passed, but they are making sure that agencies like the CFTC and SEC are underfunded so that they can’t properly implement the bill. And they’re also gumming up the CFPB as best they can.
Secondly, although a fair amount has been written about the cooperation and coordination that Dodd-Frank necessitates between different U.S. regulatory agencies, the more difficult challenge will be the coordination between U.S. regulators and foreign regulators that’s required for Dodd-Frank to be effective. This cooperation is vitally important for proper implementation of huge sections of the bill, from derivatives regulations to orderly liquidation authority. Like just about everything Dodd-Frank-related, this won’t be easy.
Lastly, it will be years before we’re truly able to gauge the effectiveness of Dodd-Frank. Unsurprisingly, many people have strong opinions about the bill, imperfect as it is, but we’ll only be able to judge how it works as we see the financial sector and financial regulation evolve–and inevitably fail again–in the coming years.