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November 1, 2011


Dismantling the Dodd-Frank "Myths"

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Recently, Neal S. Wolin, Deputy Treasury Secretary, and Anthony Coley, the Deputy Assistant Secretary of the Treasury for Public Affairs, have taken to "dismantling" some myths about the Dodd-Frank Act and Wall Street Reform.
The fact is, Dodd-Frank is with us now, and will be with us into the foreseeable future. It makes substantive changes to the financial system as we have known it. But, like any major initiative, myths build up over time, springing forth from both proponents and opponents, each with their own agendas. Most people concern themselves with Dodd-Frank in a colloquial sense - when it actually affects them at work or somehow in their daily lives. If, as Tip O'Neil once said, "all politics is local," then all Dodd-Frank is local, too.

Dodd-Frank is such an enormous undertaking that there is really no way for any one person to master its vast stretches of new regulatory implications. However, while the "myths" abound, becoming familiar with Dodd-Frank is an even greater challenge. So, whatever your persuasion on the Dodd-Frank legislation, it is worthwhile to examine the "myths" that these Treasury dons are debunking.

I have written extensively about Dodd-Frank, mostly with respect to its impact on the mortgage industry. And, I formed the Dodd-Frank Forum website and its social media platforms to help us all to vet through the many Dodd-Frank issues that will arise for years to come.

We all have a stake in watching over those who are supposedly watching over us. As Juvenal, the Latin poet, wrote, "Quis custodiet ipsos custodes?" ("Who will watch the watchmen themselves?" - My translation.)

So, in their own words, let's give the Treasury a chance to be heard:List

Myth 1: Wall Street Reform Hurts Small Banks

Myth 2: Wall Street Reform Puts the U.S. at a Competitive Disadvantage Internationally

Myth 3: The Consumer Financial Protection Bureau (CFPB) Is Bad for the Financial System


Myth1Myth 1: Wall Street Reform Hurts Small Banks

Neal S. Wolin (10/17/11)    
This claim is particularly dubious given strong support for enactment of the Dodd-Frank Act by the Independent Community Bankers of America. Wall Street Reform helps level the playing field between large banks and small ones, helping to eliminate distortions that previously favored the biggest banks that held the most risk. The Dodd-Frank Act subjects big banks to much higher standards than small banks in a number of areas:

-Tough new capital and liquidity requirements to reduce the risks presented by the biggest Wall Street firms do not apply to community banks. In fact, the law largely exempted about 7,000 community banks and thrift institutions, nearly all of which hold less than $10 billion in assets and a third of which hold less than $100 million, from these requirements.

-Wall Street Reform requires the biggest institutions to pay a larger share of the cost of deposit insurance protection, reflecting the greater risk they pose to the financial system.

-Wall Street Reform strengthens protections for one of community banks' core sources of funding by raising deposit insurance protection from $100,000 to $250,000.

The Dodd-Frank Act also helps to level the playing field between small banks and their nonbank competitors by making sure they're playing by the same set of rules. The Dodd-Frank Act gave the Consumer Financial Protection Bureau the ability to examine regularly nonbank financial services providers-like payday lenders, debt collectors, and independent mortgage brokers-and to prohibit unfair, deceptive, and abusive acts or practices that hurt small banks and Americans across the country.  Of course, in order for the CFPB to be fully equipped to carry out these crucial responsibilities, the Senate must move forward expeditiously to confirm Rich Cordray as Director.

Finally, Wall Street Reform helps make sure that small banks are not subject to excessive supervisory burdens, such as multiple exams by different regulators.  The regulators of community banks will bear responsibility for enforcing one set of rules issued by the new CFPB, allowing small banks to avoid the burden of multiple exams.

The authors of Wall Street Reform understood that small banks did not cause the crisis and should not be the focus of reform.  Small banks play a critical role in their communities-creating jobs and helping Americans borrow money to buy a home, grow their businesses, or pay for college.

Thanks to the steps now being taken, reform is helping put community banks on a more equal footing and is strengthening-not weakening-their essential role in our financial system.  That's good news for growth and job creation in communities across the country.

 Myth2Myth 2: Wall Street Reform Puts the U.S.
at a Competitive Disadvantage Internationally

Neal S. Wolin (10/18/11)     
The suggestion is puzzling-that a stronger and more stable financial system would create a competitive disadvantage.  The strong protections offered by U.S. markets for much of the 20th century helped make our financial system the envy of the world.  Rather than disadvantage the U.S. financial system, Wall Street Reform will assure investors that U.S. institutions and markets remain the world's most attractive destination for investment-dynamic and innovative, but with a renewed strength and resilience.

In the wake of the financial crisis, the U.S. set a strong example by immediately committing to comprehensive financial reform.  At the G-20 meeting in April 2009, and at multiple meetings since, world leaders have committed to a framework for financial reform to close regulatory gaps, end opportunities for arbitrage across regulatory systems, and prevent a global race to the bottom.  Key elements of this framework included improving firms' capital and liquidity positions, reforming the derivatives markets, and developing policies to address the financial risks posed by large, systemically important financial institutions.  The United States moved first, enacting comprehensive financial reform last summer, and consistent with their international commitments, other major financial systems are now putting their legal and regulatory frameworks in place.

Strong U.S. leadership has been key to the important progress the world has made in the G-20 and other international fora.  Working with our international counterparts, we have been able to reach global agreement on capital and liquidity requirements-to make sure that banks are better protected against stress-and are moving towards stronger standards for the derivatives markets, which were a major source of risk during the financial crisis.  At the G-20 Finance Ministers meeting last week, we agreed to enhanced prudential standards for large, systemically important financial institutions, along with a new G-20 framework to resolve these firms without widespread disruption and cost to taxpayers.

Of course, as we implement our reform in the United States, it's important that the rest of the world move forward as well, and we will continue to monitor progress in other jurisdictions.  A level playing field is crucial to making sure that U.S. firms remain competitive and to preventing risk from simply shifting to other parts of the world.

The critics of reform should remember that in order to remain competitive, U.S. firms need a financial system that combines dynamism and a capacity for innovation with robust protections for investors and consumers.  A strong foundation against financial shocks, whether domestic or international, is a crucial element of a strong economy: one that can attract investment; support long-term growth and job creation; and help protect American businesses, investors, and families in times of stress.

 Myth3Myth 3: The Consumer Financial Protection Bureau (CFPB)
Is Bad for the Financial System
Anthony Coley (10/21/11) 
The CFPB was created for a simple reason: to make sure Americans understand the terms and conditions of financial products.  In the system we had before, consumers were too often pushed into loans they couldn't afford or didn't understand, and often had to choose between one misleading offer and another.  That's not fair.  When people take out a mortgage to buy a home, pick out a credit card, or set up a bank account, they should understand the services to which they are entitled and  receive a clear description of the fees they are being charged.

By limiting unfair, abusive and deceptive practices, promoting clear disclosure, and giving consumers the information they need, the CFPB will help Americans make smart, informed financial decisions.  Yet despite these important responsibilities, the CFPB remains controversial among some in Congress and the financial industry.

Some critics say that the CFPB is complicating regulation or putting new burdens on lenders.  In fact, one of the CFPB's most important jobs is to simplify disclosure-which is better for everyone.  The CFPB has already launched an initiative, Know Before You Owe, to simplify and combine two federally required mortgage disclosure forms (TILA and RESPA).   There's no doubt that one, simplified form is better for lenders and consumers alike. That's not more regulation-it's simplified regulation and smart regulation.

Other critics make the claim that the CFPB is hurting small banks.  But as we explored in our first post this week, the regulators of community banks will bear responsibility for enforcing one set of rules issued by the new CFPB, allowing small banks to avoid the burden of multiple exams.  Furthermore, the CFPB is helping to level the playing field between small banks and nonbank financial service providers.  For too long, banks were playing by one set of rules, while other parts of the financial industry, like payday lenders or independent mortgage brokers, were playing by another, often with little or no oversight.

But in order for the CFPB to make sure that everyone is subject to the same clear and fair set of rules, it needs a Director.  Senate Republicans must drop their opposition to Rich Cordray's nomination as Director, so that CFPB can do its job-empowering Americans to make real choices, and leveling the playing field among financial institutions.  Without a Director, the CFPB is handicapped from exercising its full authority, because nonbank financial service providers will be allowed to function without the necessary oversight.  That's not acceptable.  It's not good for our financial system, and it's not good for the American people.

Those are the facts.

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    U. S. Department of the Treasury 


Dismantling the Myths Around Wall Street Reform
  • Myth 1: "Wall Street Reform Hurts Small Banks" - Neal S. Wolin, Deputy Treasury Secretary, Treasury Notes (10/17/11)
  • Myth 2: "Wall Street Reform Puts the U.S. at a Competitive Disadvantage Internationally" - Neal S. Wolin, Deputy Treasury Secretary, Treasury Notes (10/18/11)
  • Myth 3: "The Consumer Financial Protection Bureau (CFPB) Is Bad for the Financial System" - Anthony Coley, the Deputy Assistant Secretary of the Treasury for Public, Treasury Notes (10/21/11)


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