October 14, 2015

Shelby Delivers Speech on “The Trouble with Dodd-Frank” at Harvard Law School

WASHINGTON, DC – Wednesday, October 14, 2015 – U.S. Senator Richard Shelby (R-Ala.), Chairman of the United States Senate Committee on Banking, Housing, and Urban Affairs, today delivered a speech, “The Trouble with Dodd-Frank,” at Harvard Law School.

Excerpt of Chairman Shelby’s speech:

“The trouble with Dodd-Frank is that it has not only vested more authority in unelected, unaccountable bureaucrats, but also in unaccountable international bodies. Five years after Dodd-Frank’s enactment, the financial system and the public are becoming all-too-familiar with the law’s shortcomings. Many who expected Wall Street reform and enhanced consumer protection are disappointed.

“Dodd-Frank has succeeded in number of respects, however, including the production of thousands of pages of new, complex regulations and layers of new bureaucracy. Neither one is a substitute for the kind of reform that was needed after the financial crisis.

“As Chairman of the Banking Committee, I am leading an effort to address a number of concerns identified during the implementation of Dodd-Frank. We now have better information on how financial regulation should be tailored to help prevent another crisis and reduce systemic risk. We also know where it should be pared back to provide relief to smaller and regional financial institutions, and where transparency and accountability are needed the most at regulatory agencies.

“Even some of Dodd-Frank’s original supporters are beginning to acknowledge that the law is not untouchable and that some changes should be made. Our collective goal should be to establish a world class regulatory regime that preserves the safety and soundness of our financial system in the least restrictive manner so that we foster and support access to credit in an effort to encourage economic growth at all levels of our economy.

“A financial system devoid of risk is safe, but it is of little use if it fails to spur economic growth and job creation. Striking the appropriate balance is critical and Dodd-Frank has taken us too far in the wrong direction. It is time to recognize its flaws and make the necessary changes.”

Text of Chairman Shelby’s remarks, as prepared:

“Thank you, Professor Scott, for inviting me to speak today. The Program on International Financial Systems has been a valuable resource to the Senate Banking Committee.

“Today, I would like to discuss the Wall Street Reform and Consumer Protection Act, better known as Dodd-Frank. It has been five years since Dodd-Frank was signed into law. I believe five years is long enough to take stock of the impact it has had on our regulatory structure, our financial system and our economy.

“I did not support the passage of Dodd-Frank. I was concerned at the time that it was written in haste without any meaningful bipartisan input. Put simply, it became more of a political exercise than a body of work that recognized and addressed the root causes of the financial crisis.

“Dodd-Frank was actually signed into law before the official Congressional inquiry commission, formed to investigate the crisis, had finished its work. Once Dodd-Frank was signed into law, its supporters declared victory and the Commission’s report was rendered moot.

“Notwithstanding Dodd-Frank’s controversial beginning, it has been the law of the land for over five years. We must now determine what is working, what is not, and what needs to be changed. The law’s very name suggests that it has ‘reformed’ Wall Street. In my experience, some of the most damaging pieces of legislation have come under the guise of ‘reform.’

“Here are a few important examples: The Simpson-Mazzoli Act of 1986, passed under the guise of ‘immigration reform;’ the Deficit Reduction Act of 1993, passed under the guise of ‘tax reform;’ the Gramm-Leach-Bliley Act of 1999, passed under the guise of ‘financial reform;’ and the Affordable Care Act of 2010, or Obamacare, passed under the guise of ‘health care reform.’

“Given these precedents, what has Dodd-Frank actually ‘reformed?’ Did it bring Wall Street reform? Since its passage, the nation’s biggest banks have become even bigger, and even more concentrated.

“According to data published by the Chicago Federal Reserve Bank, the five-largest U.S. bank holding companies have grown by $638 billion since 2010 and now account for 51 percent of total assets in the system, which has $17.6 trillion, domestically.

“In addition, our financial regulators have grown in power and size. They have also become more independent and insulated from meaningful congressional oversight.

“Dodd-Frank’s title also suggests that consumers of financial products have been helped. But have they? True, Dodd-Frank did establish a new government regulator, the Consumer Financial Protection Bureau, which has now grown to about 1,500 employees.

“Yet, since its enactment, checking accounts have become more expensive, credit has become more difficult to obtain, and the choice of consumer financial products has dwindled. I think it is time to judge the effectiveness of the law by its end results, and not by the size of the bureaucracy it has created.

“Five years since the passage of Dodd-Frank, we are seeing just who has actually benefited from the law. Some of the biggest beneficiaries of Dodd-Frank have been our financial regulators, who have grown larger and more formidable.

“The CFPB, for instance, operates outside of traditional checks and balances for government regulators. It is not subject to the Congressional appropriations process, which is one of the key ways elected representatives reign in government overreach. It is also not governed by a board, as are some other financial regulators, but instead by a single director with unmatched authority.

“It is not only the size of government and the reams of regulation that have flourished under Dodd-Frank. Firms across the country are hiring individuals like those of you sitting in this room today. Your intellectual capital and expertise will be required to navigate Dodd-Frank’s complicated framework.

“It is not, however, the firms who can afford to hire all of you who I worry about in today’s economy. It is those who cannot – the small and mid-size businesses who rely on community and regional bank loans to invest in capital improvements or meet payroll.

“Such firms experience the impact of Dodd-Frank more acutely when they are forced to forgo hiring productive workers due to direct or indirect costs of regulatory compliance. And while the financial compliance business may be booming these days, economic prosperity should not be something for a select few. It should be rooted in private sector growth sustained by the drive and innovation of an unencumbered workforce, not rooted in government regulation sustained by the desire of bureaucrats to assert their own power.

“The trouble with Dodd-Frank is that it has delegated responsibility for one of the most important sectors of our economy to a group of unelected, virtually unaccountable bureaucrats. This does not mean that they are bad people, only that they are unsupervised.

“They are not accountable to Congress or the American people. This is contrary to our democratic principles which should form the basis of every piece of legislation we pass.

“Unfortunately, Dodd-Frank was written by regulators to empower regulators and further insulate them from congressional scrutiny. My Democrat colleagues often preach the sanctity of regulatory independence. What they sacrifice on the altar of independence is our ability to scrutinize the actions of those we have empowered to act on our behalf.

“There is strong bipartisan agreement that financial regulators should be free from political pressures to favor the financial interests of a regulated entity. Our desire to insulate regulators from that type of influence has been distorted and is now being used to protect the bureaucracy from legitimate congressional oversight.

“A government removed from the people is antithetical to our founding principles and presents a real threat to our liberty and free market system. What also threatens our free market is dependence on the American taxpayer to bail out troubled financial institutions. We often hear that Dodd-Frank has ‘ended too-big-to-fail.’

“Dodd-Frank received credit for doing this before most of its provisions were even implemented. It has become clear that instead of ending too-big-to-fail, Dodd-Frank has very much preserved it by requiring a group of regulators to designate which financial institutions are ‘systemically important.’

“This group, called the Financial Stability Oversight Council, or the FSOC, has, in essence, provided the rubber stamp for too-big-to-fail. There is simply no precedent in our regulatory regime for such an entity like the FSOC. It has the authority to designate a nonbank institution, such as an insurance company, as systemically important and subject it to enhanced prudential standards and regulation by the Federal Reserve.

“Some may say that this is reasonable, as long as it provides financial stability and possibly prevents another financial crisis. Let me dispel that notion.

“First, the effectiveness of the FSOC is premised on the idea that the same regulators who failed to foresee the last financial crisis will be able to predict and prevent the next crisis. Unlikely.

“Second, the designation of ‘systemically important’ serves as a signal to markets, shareholders, customers, and perhaps even management that these entities are in a protected category by being so large and significant to the economy that they will be bailed out by the federal government. It could actually become a self-fulfilling prophecy.

“Third, there are dangers to applying a homogenous label to very distinct types of financial institutions. For example, a global insurance company built on long-term assets and liabilities is very different from a global banking conglomerate with a mix of business activities, including those with much shorter-term risk.

“In addition, a Wall Street bank with trillions of dollars in exposures poses far more systemic risk compared to a regional bank in the tens or hundreds of billions with a traditional banking business model. It is a mistake to assume that these companies would fare similarly in a financial crisis and apply a one-size-fits-all process for determining regulation.

“Because much in Dodd-Frank rests on an institution’s designation, the FSOC has a duty to be as transparent and judicious as possible. Many of its designations have been criticized for lacking transparency, failing to produce clear indicators to guide others, and merely following international regulatory bodies such as the Financial Stability Board or FSB.

“If such criticism has merit, this is not how our regulatory regime ought to function. Our regulators should be transparent, issue clear guidance and be free from the undue influence of international bodies.

“Let me explain. I have voiced serious concerns about the role of the international body of regulators, the Financial Stability Board, or FSB, in the weighty decisions of U.S. regulators. Two out of the three insurance companies that the FSOC has designated as systemically important were first designated by the FSB.

“I believe that this creates a regulatory conflict because three of the ten FSOC voting members – Treasury, the Fed and the SEC – first engage at the FSB level to determine if a U.S. company is systemically important. When they return to the U.S. and supposedly engage with the rest of the Council to consider whether a company is systemically important, they have, for all intents and purposes, already made up their minds, or worse, had them made up for them.

“We must ask if the influence that the FSB seems to exert over the FSOC process is real and whether it is appropriate. An FSOC designation process has little merit if it is merely used to justify an international organization’s determination, rather than engage in an independent analysis.

“In addition, the presence of international regulators in domestic rulemaking only amplifies the challenge of regulatory accountability because it allows decisions to be made beyond the reach of Congressional scrutiny. I am concerned that this could also be a problem as it relates to the international process to establish new capital standards for insurers.

“Dodd-Frank drastically altered the regulatory landscape for insurers by subjecting certain insurance companies to regulatory requirements similar to those for banks. It imposed a Federal regulatory framework on some U.S. insurers, despite a clear exemption that exists under the 1945 McCarran-Ferguson Act.

“I have long-advocated for the primary role of the States in insurance regulation. As part of the current process, I am concerned that standards for U.S. insurers will now be determined at the international level.

“These international discussions are dominated by European regulators who are likely to follow their own interests or, at the very least, are less familiar with our laws and practices, including the unique and important role of our State-based regulation. Given how different the insurance landscape is in Europe compared to the United States, there is little reason to believe that capital standards for insurers that work well in Europe would work domestically.

“For example, many European regulators have focused their attention primarily on a few large players that dominate the insurance industry, and on preventing the failure of these large insurance holding companies. The U.S. market, on the other hand, has a system that aims to foster competition among many different sizes and types of insurance companies. Regulation in the U.S. is primarily conducted at the state-level and is focused on protecting individual policyholders, not immunizing large companies from failure.

“Our representatives to these international discussions must ensure that their positions, and especially any resulting agreements, recognize these differences and do not disadvantage U.S. companies. While there should be global dialogue between regulatory bodies, international standards should not be a way to circumvent domestic rulemaking and shield U.S. regulators from accountability to Congress and the American public.

“I recently sent a letter to Treasury Secretary Jack Lew, Federal Reserve Chair Janet Yellen, and SEC Chair Mary Jo White asking them to provide more insight into the FSB process and their respective roles in it. The lack of transparency with the FSB is concerning and needs to be addressed.

“Once again, I thank Professor Scott for inviting me here today and all of you for participating. I look forward to your questions. Thank you.”

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