July 18, 2010 7:02 pm
The US financial regulation bill passed by Congress last week is comprehensive and far-reaching. The White House, whose first design proved influential, and the bill’s sponsors are right to call it historic. But few delude themselves that the new law settles much. The real work starts now.
The Dodd-Frank law expands the powers and responsibilities of multiple agencies, but says little about what the new rules will require of financial institutions: so many pages, so little content. In many instances, Congress has told the regulators to balance conflicting objectives but given little guidance about how trade-offs – for instance, between financial safety and availability of credit – should be struck.
Wider discretion was in many cases desirable or inevitable. Rules must fit the circumstances. Nonetheless, it is a hazard and a cause of uncertainty. The regulators must waste no time in staffing up, clarifying their rules and methods, and learning how to co-operate.
Better interaction among regulators will be vital. The complexity of the old organisation chart helped cause the crisis – emerging concerns cut across jurisdictions – but the new one is no simpler. According to most counts (there is room for dispute, which tells you something), the number of agencies has increased. New co-ordination mechanisms are in place, and much depends on them.
The new Financial Stability Oversight Council, the principal co-ordinating body, will be responsible for systemic safety. The Fed will be its main operating arm. These are good innovations, but how the system functions will be for its constituent parts to decide.
Maintaining a sense of urgency as the politicians, for the moment, step aside will be a challenge. The same is true of the reform’s other main innovations: early resolution authority, which will not be tested until a big, complex, troubled firm has to be wound up; the diluted Volcker rule, which curbs banks’ proprietary trading without defining proprietary trading; and derivatives regulation, which is to be tightened through standardisation and exchange trading, but with exemptions of uncertain scope.
Most important, the bill is almost silent on capital requirements. Eyes must turn now to the Basel process, in which national regulators are negotiating that crucial issue. Progress has been slow, and there are indications that the new rules may be too lax. If Basel fails, the innovations of the US law will be undermined, and the whole project rendered somewhat beside the point.
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.