President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law in 2010. More than three years later, regulators have only finalized 158 of the 398 rules called for and missed 172 of the 279 rule-making deadlines outlined.
The Obama administration took two measures this summer to assure interested parties that the reforms are still a top priority, however. In July, Treasury Secretary Jacob Lew told attendees at the Delivering Alpha conference that the core elements of Dodd-Frank would be “substantially in place” by the end of 2013. To back this up, President Obama held a closed-door meeting with top financial regulators in August to apply pressure to implement the remaining measures.
With these two powerful gestures, you would think banks must be scrambling to get their systems up to date for the impending regulatory reporting changes. But the reality is that the as-yet-unimplemented portions of Dodd-Frank will be expensive and cumbersome for banks. And after only implementing 39% of the Dodd-Frank reforms in three years, financial regulators do not have a strong track record for efficiency. Many banks are betting that much of the remaining 60% of reforms will take a long time to enact, and could eventually just be dropped entirely.
For these reasons, the major banks are sitting high, aware of the bill and the implementation push by President Obama, yet acting as if nothing has changed. So, who will blink first in this game of regulatory chicken? What risks are banks taking with their nonchalant approach to these impending regulatory changes?
There is considerable risk to the economy should banks continue to be allowed to operate absent the increased regulation promised by the Dodd-Frank Act. A lack of follow-through by regulators may undermine confidence in the entire economic system, especially when financial directives become political shouting points. Sensitivity to the industry and political intervention have seldom received as much attention as in the last few years. Global investors are aware of the issues in the sector, and are demanding follow-through by regulators to ensure safer and more transparent markets for informed investment decisions. Problems with reform execution will continue to undermine investors’ confidence.
Banks are hoping that, by slowing down execution, they will ultimately save money if elements of the reform are dropped. But the reality is that regulators are actually reinforcing their push for implementation of Dodd-Frank reforms. Though there is indication of some limited softening on timeline, authorities are essentially staying with the plan, driven by a combination of political pressure and general negative public sentiment toward the banks.
So what will be the impact of delayed compliance? First, the obvious monetary risk comes in the form of fines and penalties for non-compliance. There is little reason to expect leniency as regulators and voters have virtually zero tolerance for excuses from the banking sector. Second, there is the long-term, fully-loaded cost of completing the work to adhere to regulations. Such complex projects only become more expensive when begun under frantic, last-minute circumstances. To mitigate these enormous execution risks, banks will inevitably throw money at the problem, rather than develop smart plans and execute well ahead of deadline.
Banks are taking huge risks by betting against regulators’ ability to implement reforms in a timely manner. At Delivering Alpha, when Sec. Lew said “some in this room” were part of the crowd that tried to thwart the new law, he was speaking not only about the law at hand, but also about a persistent mentality in the banking industry to fight regulation.
The Ernst & Young 2013-14 Global Banking Outlook notes, “Although customers are broadly satisfied with their banking relationships, the industry as a whole remains tarnished by the events of the last few years.” The report goes on to assert that the “slow pace of reform within banks has provided further ammunition for critics” and that “the industry needs to shift from a reactive to proactive stance.”
President Obama’s push to implement the remaining portions of Dodd-Frank is a perfect opportunity for banks to step up and show the public that they care. Their hands-off attitude only serves to further tarnish already over-oxidized reputations.