Dodd-Frank: What Works, What Doesn't and What Can Be Done About It?

The five-year anniversary of the Dodd-Frank Act has inspired a number of industry experts  to revisit the law’s impacts on the financial industry.  The latest of these is a blog post from  Stephen Cecchetti, Professor of International Economics at the Brandeis International Business School and Kermit Schoenholtz, Professor of Management Practice in the Department of Economics at New York University’s Stern School of Business. Both professors describe Dodd-Frank as a mixed success and acknowledge that Dodd-Frank has limited some risk in the financial system, but worry the regulation does not address larger problems. They write:

“Together, these changes are making the financial system more resilient, but the system is still far from safe. And the reforms will not reduce the likelihood of the next crisis to an acceptably low level…From the start, DF has contained critical holes and created mechanisms that reinforced poor incentives. It is also overloaded with costly regulations that were unlikely to make the system safer, even if fully implemented. And, because it is so complex, full implementation remains a long way from complete – even as we mark its fifth birthday.”

Six of the key components the professors say are missing from Dodd-Frank are:

• a streamlining of the regulatory structure
• a restructuring of the government-sponsored enterprises (GSEs)
• a reform of systemically important markets (like money market mutual funds and repo)
• effective pricing of government guarantees
• a resolution mechanism that promotes proper incentives; and
• a shift to regulation by economic function rather than legal form

The full post from Professors Cecchetti and Schoenholtz can be read here.