Three years after the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, it’s time to be honest about financial-sector reform: It hasn’t gone well.
Specifically, three issues have become abundantly clear. First, there was insufficient commitment in the original reform effort to end the core problem of “too big to fail” financial institutions. Second, senior leadership at the Treasury Department and other officials became comfortable with the glacial pace of implementation. Third, weak intent and official foot-dragging created fertile ground for lobbying, which further allowed the megabanks to slow the detailed rule-writing. At present, reform is on a trajectory to do too little, too late with regard to addressing the next crisis.
Recently, Treasury Secretary Jack Lew promised to cut through this Gordian knot. It’s an uphill battle, but if Lew applies himself, he could make a real difference in changing the way the financial system operates.
Under Dodd-Frank, the Treasury secretary has a central role in financial regulation. While previous secretaries led a working group on capital markets and had the potential to exercise moral leadership on financial issues, most just let these issues slide. But Dodd-Frank created a Financial Stability Oversight Council and made the Treasury secretary its chairman.
The previous Treasury secretary, Timothy Geithner, used these new powers sparingly – rapid reform wasn’t his priority. But when it came to money-market reform, Geithner’s Treasury demonstrated that it could use the FSOC to overcome a roadblock at the Securities and Exchange Commission. In principle, the same approach could be used to speed up reform implementation more generally.
And that is what Lew wants to do. “Let there be no doubt: Finishing the job of financial reform is critically important to me and this administration,” he said in his speech to the financial community in New York.
He even gave a specific timetable. “We will measure our progress in weeks and months, not in years,” he said.
He listed measures to be taken, with particular emphasis on the so-called Volcker rule. And he made clear that, despite the best efforts of European trading partners to persuade the U.S. to water down the rules on bank equity and regulation more broadly, “we will not let the pursuit of international consistency force us to lower our standards.”