Markets In Action

Some Good, Some Bad, Some Ugly

Experts agree that focus should be on better regulation; not just more for less. 

An expert panel at SIFMA’S 2016 annual meeting examined the end-user impact of financial regulation, identifying a wide variety of areas for improvement but generally concurring that the issue transcends the traditional binary debate of more vs. less government regulation.

“Dodd-Frank” has been almost completely implemented over the past six years, said Martin Neil Baily of the Brookings Institution. Justin Schardin of the Bipartisan Policy Center said, “we’ve made real progress.”

But panel participants highlighted important remaining shortcomings of current law, as well as unintended consequences of some of Dodd-Frank’s provisions.

The Federal Reserve, for example, is now prohibited from lending to individual companies via its discount window, Schardin said, and can only aid entire classes of institutions.  As banking has evolved over the past years, many crossover lenders have emerged that require a more flexible approach to providing this assistance.

J.W. Verret, an assistant professor at the George Mason University School of Law, urged a greater focus on cost-benefit analysis, particularly at the U.S. Securities and Exchange Commission.  “It’s a staple of good government,” he said, noting bipartisan support for the concept in Congress and among economists, but the SEC’s Division of Economic and Risk Analysis (DERA) has little authority to intercede in the development of new rules that cost more than their benefits.

Michael R. Williams, vice president and treasurer of Orbital ATK, Inc., a manufacturer and developer of rockets, satellites, and other high-tech products primarily for the U.S. government, noted that federal contracts do not allow for much flexibility in passing along additional costs, which Dodd-Frank and other financial regulation sometimes impose.  Increasing the cost and complexity of hedging mechanisms such as derivatives, he said, and requirements for more loan collateral “go directly to our bottom line.”

Even worse, he said, are the penalties Orbital must pay if the company is late delivering a product, even if the delay was caused solely by the burden of complying with complex and overlapping regulations.  “As a [regulatory] end user, we’re looking for free and open markets.”

Asked about the overall impact of Dodd-Frank on the U.S. economy, panelists had mixed opinions. As Schardin opined, “some good, some bad.” While Verret added, “some ugly.”

Noting that growth has been unusually slow for the past six years, Baily said “I don’t think financial regulation is to blame for all of that, but it may be some.  We’ll definitely want to address it more going forward.”