Financial regulation

As its title suggests the Dodd-Frank Wall Street Reform and Consumer Protection Act is a dense read and an ambitious piece of legislative work.

Over 2,319 pages the authors, Democratic lawmakers Chris Dodd and Barney Frank, have tried nothing less than to completely revamp the regulation of the financial sector in the US and to establish protection for American consumers. In their big sweep of the financial system - with the exception of the housing sector, they left no stone unturned.

The result was signed into law on July 21, 2010 by President Barack Obama after it had passed Congress with votes pretty much along party lines. And while there has been criticism from some Democrats that Dodd-Frank doesn't go far enough, from Republicans that it goes too far and from economic analysts that it is too broad, there was a general consensus that this Act is indeed historic as it entails the most sweeping reform of Wall Street since the Great Depression of the 1930s.

Delays and deadlines

But now, one year after it became law, Washington is still struggling to implement even key portions of the massive bill. According to the law firm DavisPolk, which monitors progress on Wall Street reform, as of June "only 6.2 percent of all of Dodd-Frank's rulemaking requirements have been met with finalized rules."

The firm also predicts that regulators will miss a huge number of deadlines in July and points out that 30 percent of all rulemakings don't even have a deadline, among them key issues like the creation of the Consumer Financial Protection Bureau.

So with Wall Street reform still not in place four years after the financial crisis began in 2007 and one year after Dodd-Frank was signed into law, is it time to call it a failure?

"No, it's way too soon to pronounce Wall Street reform or Dodd-Frank as a failure," Jared Bernstein, until May Chief Economist to US Vice President Joe Biden and a key member of the White House economic team, told Deutsche Welle. "I would say the implementation is going slower than I would like it."

Nicholas Veron, a senior fellow at Bruegel, the Brussels-based economics think tank concurs: "I think it's not fair to call it a failure, it's just a protracted process which is taking a lot of time."

Lobbyists and politics

Both experts argue that the delay, ranging from six to 12 months depending on the different aspects of the Act, is due to heavy lobbying from the financial sector and partisan politics.

According to a Wall Street Journal analysis, the finance industry spent more money on lobbying US government officials in the first quarter of this year than it did when Dodd-Frank was actually debated in the first quarter 2010.

A trade group representing hedge funds alone spent $950,000 (654,000 euros) in the first quarter 2011 lobbying officials on Wall Street reform, reported the Associated Press.

"I would argue that the lobbying machine was up and running from the beginning on this one and has been doing all it can to slow down the implementation of Dodd-Frank," says Bernstein, now a senior fellow at the Center on Budget and Policy Priorities in Washington.

Add to that Republican obstructionism which culminated in the recent refusal to approve a Nobel Prize winning economist as Federal Reserve governor because he wasn't qualified enough and one is ready to concede that perhaps it is already an achievement that Wall Street reform is still on the political agenda at all.

Derivatives and capital requirements

Asked which elements of Dodd-Frank are the most urgent to be implemented, Bernstein and Veron both cite the creation of the Consumer Financial Protection Bureau, an entity slated to help consumers navigate safely through the sea of financial offerings.

In addition, regulations for derivatives and increased capital requirements, especially for so-called systemically important financial institutions are among the three aspects of Wall Street reform which should be implemented first, argue Bernstein and Veron.

It may take another year for Dodd-Frank to be fully operational, but despite all the delays it is only a question of time, because Wall Street reform still enjoys popular support in the US, notes Bernstein:

"People may well be suspicious of government intervention, but they are sure suspicious of the banking sector as well."

He adds: "In fact one of the most pervasive sentiments in our country is that the folks who have led us into this great recession have not only escaped scot-free, but they seem to be the only ones who are doing particularly well right now."

EU and Greece

So while financial reform in the US is essentially a matter of implementation, Europe which in the past repeatedly chastised Washington's unwillingness to create tougher rules, hasn't even started yet.

"In the European Union we are still at the level of discussing legislative measures rather than implementing regulations as is the case in the US with the finalization of the Dodd-Frank Act," explains Veron.

If one just looks at the three key pieces of legislation which correspond to the key planks of the Dodd-Frank Act, "for most of them we don't even have a draft and even for the most advanced ones we are not even at the point of finalization," says Veron. "So basically Europe is far behind the curve compared to the US on these key aspects of financial reform."

What's more, the EU has been in continuous crisis mode since 2007 and currently has its hands full trying to avert a total economic meltdown of Greece.

In other words: It's very difficult to think about fire insurance while your house is burning down.

Author: Michael Knigge
Editor: Rob Mudge