Battle of Brooklyn Pt. 1: DFA and Transparency (Apr. 15)

Mike & Co. —

At last night’s debate in Brooklyn, HRC took care of any lingering doubts in a few swift sentences — only one candidate will enforce, if not reinforce, Dodd-Frank… and knows what it means.   Dispelling the cloud of uncertainty around Sen. Sanders’ comments on banking policy during his NY Daily News interview, HRC revealed the substantive and political inadequacy of Sanders’ approach.   And she didn’t even have to say Glass-Steagall.

The debate is reverberating around DC amid a flurry of related regulatory activity around issues at the heart of Dodd-Frank. The first of two surveys of the state of play of the issues in both the New York and Washington context, with a focus on transparency, follows.

Good weekends all,

Dana

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The Democratic candidates had plenty of fodder for debate last night in a state where the finance and insurance industries represent 16 percent of the $1.3 trillion economy.  The issue of banking regulation gained new currency on Wednesday when federal regulators said five major U.S. banks don’t have adequate contingency plans for how they could go bankrupt without disrupting the U.S. financial system, as required under the Dodd-Frank regulatory overhaul enacted after the 2008 financial crisis.

As banks digest the news and markets react, two competing choruses have struck up a tune: either the mass flunking of banks’ living wills is yet another symptom of an ailing DFA, or a sign of banks’ continued flaunting of regulatory standards set forth after the last financial meltdow and the law operating successfully to constraint their risks.

The View from New York 

Banks are responding to pressure placed on them by regulators – if they weren’t then Wednesday’s release would be the same as the one in 2014 (all banks failed).  It wasn’t.  Regulator’s will hone and streamline Dodd-Frank, they should dons in a transparent fashion.  Supporters of Dodd-Frank should be confident that transparency in banking policy will help the public see and understand how DFA is starting to win the fight against TBTF.

The Debate

TBTF Issues led to some of the most contentious moments of last night’s debate at the Brooklyn Navy Yard.  In the crucible that is the New York primary, HRC has maintained that defending DFA’s progress is a necessary and vital goal for the Democratic party, a potent counter to Sanders’ fiery populism.  But it turned out he could not explain his remedy coherently at the debate either.

The View from Washington

DFA:  Success or failure?

While financial watchdogs praised Wednesday’s Fed/FDIC announcement on living wills, calling on banks to ramp up their efforts to comply with resolution plan requirements by October 1, critics of regulators have argued that the Fed and FDIC’s process is opaque, capricious, and therefore harmful for capital allocation and therefor economic growth.  That is, it lacks transparency.

The fresh criticisms of Dodd-Frank began even before Wednesday’s announcement, as results were leaked to the Wall Street Journal on Tuesday evening.  The paper’s op-ed released Wednesday evening called the living will process further proof that DFA is retreating in the face of judicial oversight.  Citing the FSOC’s loss against MetLife (already being appealed), and tough questions facing the CFPB from a federal judge, the editorial board asserts that these setbacks are caused by the fundamental failure of transparency in implementing DFA.

The reality is that DFA is part of an iterative regulatory process – it takes time because bureaucrats are not magicians.  The correct view of the regulatory landscape is one that’s been put forward repeatedly in recent weeks: legal challenges and judicial decisions are opportunities to streamline procedures.  Far from being the death of Dodd-Frank, calls for transparency and accountability are part of an evolutionary path toward better regulations.

Accountability vs “Accountability”

According to these DFA critics an opaque and capricious regulatory landscape allows bureaucrats to attack businesses with impunity, and forcing them to operate in the daylight is the only way to combat these abuses.  The truth of the matter is that increased transparency in DFA institutions should be viewed as an opportunity both by regulatory agencies and Democrats.

Allowing the public to see how these decisions are being made will only serve to increase support for Dodd-Frank and help banks and firms better understand how they can move their actions in line with regulators’ expectations.

Not all transparency measures are equal. Here’s an example of a useful way and a less useful way to push for transparency and accountability:

  • H.R. 3340: Legislation that would tie the FSOC and its research arm, the OFR, to the annual appropriations process – far from creating true accountability, this would instead politicize the council and make it beholden to whomever holds the majority in Congress.
  • GAO-16-341: A paper released on Tuesday that recommends the Federal Reserve and FDIC makes their “living wills” evaluation criteria more transparent so that banks can better address concerning points in their plans before submission.  Transparency to the public would also calm markets and make clear that the agencies are operating within reasonable boundaries.

Bottom Line

With an FSOC meeting coming up on April 18 that’s set to cover asset management regulations, especially in the wake of five US banks having “not credible” living wills, last night’s debate was well-timed for a conversation on the regulatory landscape in America.

As the campaigns move forward and the debate around DFA continues to rage, it’s important for its advocates to see the opportunities that arise.  The transparency debate is one such opportunity.  Here is the chance to call conservatives critics’ bluff: they claim that regulators want to operate in secret because they’re fickle and politicized, but that’s not the case and now is the time to wager that the public will in fact be interested and maybe gratified to see DFA operating to reduce TBTF, if regulators pull back the curtains a bit.

 

 

 

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