How the Dodd-Frank rules are made

A "report card" for the Dodd-Frank Act is displayed one year after the legislation passed in Washington, D.C.

Kai Ryssdal: The day it was signed a year ago, the Dodd-Frank bill was -- plus or minus -- 800 pages long. Plenty, a reasonable person would think, to regulate almost anything. Problem is, the thing had to get past Congress. So less, actually, was more. Because it didn't spell out all the specific regulations banks and financial firms would have to follow, Dodd-Frank actually got signed. But now the thing's even longer because the rules are very slowly being written.

We asked Marketplace's David Gura to explain how the sausage is made.


David Gura: For most of us, a cushion is something we sit on. For a bank, it's a bundle of money, kept in reserve. If the bank loses money on some crazy investment, that cushion allows it to pay its bills and it lets customers withdraw money as usual.

Simon Johnson is a professor at MIT. He used to be the chief economist of the International Monetary Fund. He says the financial crisis showed us the big banks' cushions weren't big enough.

Simon Johnson: If big U.S. banks had had more capital, they could've absorbed more losses without there being a threat of bankruptcy, and that would've made the entire system much more stable.

In other words, plumper cushions make for softer landings. Dodd-Frank orders banks to keep more cash in reserve, but it doesn't give details. So over the past six months, rule-makers have been hard at work, deciding just how plump the banks' cushions should be -- and what they should be stuffed with. But just how do they decide?

Johnson: I think it's a black box. Honestly. Exactly the basis on which the regulators make their decisions is in many cases not fully transparent.

Notice the plural there. "The capital requirement rule" is being written by not just one, but three agencies: the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve Board. None of them would talk to me.

Charles Taylor, who directs the Pew Financial Reform Project, was a lot more helpful. He told me each regulator started by posting a draft version of the rule online late last year.

Charles Taylor: Industry, academic and other interested parties provide comments on the intent and the form of the rule, and then it's revised.

That's an open invitation to banks, lobbyists and private citizens -- to write in and comment on the proposal. The rule attracted 16 letters. That's about average for a rule that's not a hot-button consumer issue.

Dennis Kelleher runs a nonprofit called Better Markets, which supports stronger capital requirements. Since Dodd-Frank was passed, he's written, or co-written, more than 50 comment letters on a range of issues.

Dennis Kelleher: We will then follow it up by talking to the staff. We will go in for a meeting. We will meet with staff and/or commissioners and/or the chairman depending on who has an interest in this. And we make ourselves available to respond to what other people have to say.

Teams of lawyers and lobbyists, representing trade associations and financial firms, formed long lines outside the rule-makers' offices to make their cases. The stakes were high for the financial industry. They argued the U.S. would lose business to other countries, that their costs would go up, and it would be tougher for them to lend to folks like you and me.

In June, a frustrated Jamie Dimon, JPMorgan Chase's CEO, confronted Federal Reserve Chairman Ben Bernanke at a banking conference in Atlanta.

Jamie Dimon: Now, we're told there are going to be even higher capital requirements -- so called SIFI charges and GSIFI charges, etc. And we know there are 300 rules coming. Has anyone bothered to study the cumulative effect of all these things?

That cumulative effect was just one of the factors regulators have taken into account in nearly 12 months of back and forth with lobbyists. Washington is a pretty adversarial place these days, so I was surprised by what Charles Taylor of the Pew Project had to say about the rule-making process. He thinks it's been relatively open. And, so far, there haven't been many big turf wars.

Taylor: One of the hallmarks of the aftermath of the 2008 crisis has been the level of dialogue and coordination. That's true both inside the United States, amongst the financial regulatory agencies at the federal level in particular, and also internationally.

Today, one year after Dodd-Frank became law, regulators are putting the final stitches into the capital requirements cushion: the rule takes effect later this month. But there are 385 rules in all. So here, in Washington, we'll see those comment letters, those long lines of lobbyists, again and again and again.

I'm David Gura for Marketplace.

About the author

David Gura is a reporter for Marketplace, based in the Washington, D.C. bureau.

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