Five years on, bank regulation still a work in progress

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Five years after the financial crisis, a battle is still being fought over Dodd-Frank, a series of reforms designed to prevent a recurrence.

Call it a work in progress.

As the global financial system continues a long, slow healing process, the echoes of the implosion inflicted by the credit collapse of 2008 are fading into history.

Yet five years after the worst financial crisis since the Great Depression, a pitched political and regulatory battle is still being fought over multiple provisions of a far-reaching series of reforms and regulations, known as Dodd-Frank, that were designed to prevent a recurrence.

"The financial crisis crushed the American economy and devastated American taxpayers, households and businesses and that's what we cannot afford to have," said Michael Barr, a University of Michigan law professor and former Treasury official who as a key architect of the law. "Dodd-Frank and other reforms are making the system safer and fairer and that's exactly what we need."

But five years after Dodd-Frank was enacted, roughly 40 percent of the nearly 400 proposed rules required under the 850-page law have yet to be finalized. A fifth of them haven't even been proposed, according to Davis Polk & Wardwell, a law firm that has tracked the Dodd-Frank rule-making progress since the law was enacted.

And with many of the bill's original supporters in Congress no longer in office and the urgency of the 2008 financial crisis fading from public memory, the law has recently come under attack from multiple fronts as well-heeled corners of the financial services industry seek to have rules delayed, watered down or revoked.

"For most of the short life of Dodd-Frank, there has been an aggressive campaign to repeal it," Treasury Secretary Jack Lew said at a Brookings Institution appearance earlier this month. "We're seeing proposed changes that are in the name of simplifying it that would actually go at the heart of some of the protections that we've put in place."

From the beginning, the debate over how to create new regulations to prevent another financial meltdown was one of the most contentious of the past decade, pitting reform-minded Democrats against free market Republicans aided by an army of lobbyists on all sides.

The resulting Dodd-Frank Wall Street Reform and Consumer Protection Act-named for former Democratic Rep. Barney Frank and former Democratic Sen. Christopher Dodd-was a sprawling, kitchen sink of proposed regulations, signed by President Barack Obama in July 2010, which contained 17 separate sections, governing everything from car loans to CEO pay to Congolese conflict minerals.

The creation of the legislation governing the well-funded financial services industry fueled a massive lobbying effort that continues as the rule-making process drags on.

While sweeping in scope, the law Congress enacted left the details of specific rule-making to a patchwork of regulatory agencies, including a newly created Financial Stability Oversight Council designed to coordinate the rule-making process. A new Consumer Financial Protection Bureau, an independent consumer lending watchdog, consolidated regulatory powers once housed in seven different federal agencies with a mandate to protect individuals from abusive lending practices by the financial services industry.

With hundreds of new rules being written by multiple agencies, the law became a ripe target for a group of well-paid lobbyists. That's one reason that, despite specific deadlines attached to many of the new rules, Dodd-Frank remains a work in progress.

Of the 390 required regulations, some 235 have been finalized and another 71 have been proposed, but not finalized, as of March 31, according to Davis Polk.

For the 271 requirements with deadlines that have expired, two-thirds have been finalized and rules for 58 have been proposed. Thirty-three rules that have missed their deadlines have not even been proposed.

But while the pace of rule-making drags on, so has the industry spending on lobbyists.

Last year, financial services companies and other interested parties spent nearly half a billion dollars on more than 2,300 registered lobbyists to make the rounds on their behalf to try to steer the rule-making process in their favor, according to the Center for Responsive Politics.

Among the biggest spenders were insurance companies ($151 million), securities and investment firms ($100 million), real estate companies ($96 million) and commercial banks ($61 million), according to the group's data. Since 2010, the financial services industry has spent roughly $2.5 billion on lobbying alone. (That doesn't include another $1.5 billion in campaign contributions for the three election campaign cycles since Dodd-Frank was enacted.)

Despite efforts in Congress to weaken its regulatory impact, Dodd-Frank is widely credited with making the financial system safer and protecting consumers from some of the worst predatory lending abuses that contributed to the 2008 financial crisis.

Consumers see the benefits of these new regulations every time they pull out a credit card, said Barr.

"It used to be that credit card companies could move around your due date every month, making it hard to pay your bills on time; they no longer can do that," he said. "Credit card companies could also retroactively impose higher interest rates on your balances and they can't do that anymore. They could impose really high fees for going over your credit limit."

Restrictions on mortgage lending have banned predatory practices that became commonplace at the height of the lending frenzy that led to the crisis.

Read More How Dodd-Frank changed housing, for good and bad

And there's general agreement that the nation's financial system is stronger, and better able to withstand another credit shock, thanks to rules calling for increased capital cushions and regulations seeking to restrict some of the riskiest practices that brought the global credit system to a virtual standstill in 2008.

But some critics of the law argue that portions of it went too far, producing unintended consequences that have placed undue burdens on some corners of the financial services industry. Tighter restrictions, for example, have reduced the amount of liquidity in the bond market, according to bankers like Larry Fink, CEO of investment management firm BlackRock.

"We have reduced the power of the banks to play that role as a buffer," he told CNBC. "And at the same time banks are-because of higher capital standards-not lending as much, so we are more reliant on the capital markets than ever before. ... This should not have been unexpected. They should have been thinking about ways to mitigate that reliance."

Smaller, community banks say they're at an unfair competitive advantage after being swept into a regulatory net designed for global industry giants.

This week, Federal Reserve Chair Janet Yellen said that she feels their pain.

"The slow pace of economic growth and recovery that we have had, the low interest environment is squeezing their margins and the regulatory burdens that they face have been really quite high and they're struggling with it," Yellen told lawmakers on Capitol Hill. "We are looking at the way that we supervise community banks to do everything within our power to reduce the regulatory burdens."

As the remaining Dodd-Frank rule-making process continues to drag on, Congress is debating a series of efforts to roll back or repeal portions of the law. In May, the Senate Banking Committee approved a 216-page, eight-section bill that proposed the largest overhaul of Dodd-Frank since the law was passed. Among other things, the measure would lift the threshold subjecting bank holding companies to closer scrutiny from $50 billion in assets to $500 billion.

"(The proposal) means fewer institutions would be covered by strong regulations, tougher supervision for capital standards and be held to more conservative balance sheets," said Georgetown University law professor Emma Jordan, who specializes in wealth inequality and economic justice.

Others argue that the law hasn't gone far enough to tame powerful financial forces that continue to put the global banking system at risk. Efforts to curb trading in derivatives-the financial rocket fuel that accelerated the 2008 crisis-haven't gone far enough in restricting offshore transactions, according to Michael Greenberger, a University of Maryland professor and former United Nations advisor on global financial regulation.

"Wall Street, at its own discretion, can avoid transparency capital requirements simply by executing a trade outside the United States," he said. "But these countries aren't going to bail the U.S. system out, the taxpayer is. We've outsourced Dodd-Frank protections in the area where the economy was most vulnerable in 2008. And that is a threat to the U.S. taxpayer."

Critics also argue that the law, so far, has failed in one of its most fundamental goals-to prevent the need for another government bailout of giant banks deemed "too big to fail."

"The whole law leaves the financial system vulnerable," said Cornelius Hurley, a Boston University professor and former Federal Reserve official. "The law was designed to eliminate bailouts and banks that are too big to fail, and it didn't do that. Where Dodd-Frank went wrong was in not declaring its policy to break up the banks that are too big to fail."

Instead, the law required big banks deemed to pose a "systemic risk" to come up with their own plans to wind down operations-without taxpayer support-if they reach the point of going under. The 11 largest banks have submitted three rounds of proposed versions of these so-called living wills to regulators, but so far they haven't been "deemed credible," said Hurley. The fourth round, expected next year, will likely unfold as the presidential election approaches, he said.

And, given the ongoing efforts to repeal key portions of Dodd-Frank, a lot will be riding on the outcome of that election.

"As long as Obama is in office, he has veto authority to veto attempts to repeal Dodd-Frank," said Hurley "So a lot rides on the presidential election. If a Bush or whoever comes in and the Republicans continue to control the Senate and the House, meaningful portions of Dodd-Frank could be repealed."

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