Is Dodd-Frank Overdue or Overkill? 2 Dueling Views

 Will the Dodd-Frank financial regulatory overhaul thwart a future crisis?

That depends on who you ask.

“While the Dodd-Frank bill improved matters, it went nowhere far enough: the problems continue, and as long as they continue, our economy is at risk,” Joseph E. Stiglitz, the Nobel Prize-winning economist, told the Senate Banking Committee on Wednesday.

“Like any strong medicine,” he said, “if applied incorrectly or excessively, the Dodd‐Frank Act can produce more harm than good.”

Conversely, a former top financial regulator testifying at the Senate hearing cautioned that the law bordered on overkill. Eugene A. Ludwig, the former comptroller of the currency during the Clinton administration, praised portions of the Dodd-Frank Act while warning that it could put “a deleterious drag on capital formation and meaningful job opportunities for our people.”

The debate at the hearing reflected larger partisan wrangling over the law, enacted in response to the financial crisis.

Democrats largely back Dodd-Frank, saying Wall Street was long overdue for a crackdown. Republicans counter that the law will crimp the banking industry’s profit-making engines at a fragile time for the American economy. Conservative lawmakers in the House of Representatives have introduced some two-dozen measures to kill or roll back the law.

Spanning more than 2,000 pages, Dodd-Frank touches on areas like the $600 trillion derivatives market and weak loan underwriting standards that fed the mortgage bubble.

But as regulators put the finishing touches on some 300 new rules under Dodd-Frank, tough new capital requirements have emerged as one of the thorniest provisions in the vast new law.

Under Dodd-Frank, a council of regulators must designate the financial firms — including mutual funds, insurance companies and hedge funds — that pose a systemic risk to the financial system. These firms, and the so-called too-big-to-fail banks like JPMorgan Chase that have more than $50 billion in assets, will face higher capital requirements and broader federal oversight.

“In the aftermath of the crisis, the banking sector has become more concentrated, and the risk posed by too-big-to-fail banks has, if anything increased,” Mr. Stiglitz said.

Banks loathe the thought of tougher capital requirements, calling it a “surcharge.” The banks note that the Basel Committee on Banking Supervision is already ramping up its own international capital standards.

“We now have very tough capital requirements and capital levels that significantly exceed previous requirements,” Mr. Ludwig, who is now chief executive of the financial advisory firm Promontory Financial Group, said in prepared testimony. “At the end of the day, capital is an important tool in the supervisory toolbox, but it is only one tool. He went on to advise against “any further increases in
capital requirements beyond the tough new Basel rules.”

Mr. Stiglitz, however, called on regulators to cut the big banks down to size.

“Excessive leverage has large societal costs,” he said in prepared testimony. “Banks, and especially the big banks, need to be restrained.”