Illustration by: Bloomberg View
Illustration by: Bloomberg View

With the first anniversary of the Dodd-Frank financial reform law on July 21, it’s a good time to ask: What has it accomplished?

Consumer advocates, many congressional Democrats and some economists say banks are still too big, the derivatives market remains untamed and opaque, and regulators have been slow to write hundreds of rules. The financial industry and Republican lawmakers, on the other hand, say regulators have gone overboard, hobbling financial firms with onerous demands, creating regulatory uncertainty and slowing the economic recovery.

There are two problems with these views. First, regulators can’t be moving both too hastily and too cautiously. And second, such perorations seem to forget that, less than three years ago, the financial system almost buckled under the weight of worthless mortgages, and the country narrowly avoided another Great Depression. Regulators had been blind to the credit boom and bust; banks took huge risks that exploited regulatory gaps. Today, the economy remains weak, not because of overzealous regulators but because of the lingering fallout of the financial crisis. Fixing all of this will take more than a year, and is bound to rile financial institutions because, well, it was meant to.

Dodd-Frank isn’t perfect, but already its influence on the financial system has been positive, in ways big and small. Accounting is more transparent; off-balance-sheet assets are largely a thing of the past. Some banks are selling units that are too risky, or that require them to hold capital they don’t have. As Bloomberg News has reported, banks are even hiring consumer advocates to make sure their policies on overdraft fees and credit cards will pass muster, now that the new Consumer Financial Protection Bureau is about to send out examiners.

Getting Tough

Regulators are being tougher, too. We know this because bank lobbyists are spending a bundle on Capitol Hill, hoping to rein in the regulators, or at least starve them of the money they need to perform their new tasks. That is folly. Without adequate financing, regulators won’t be able to hire the best and brightest or acquire the technologies necessary to police the markets.

More big changes are coming, and with them, surely more complaints from the financial industry. Rules limiting proprietary trading, the kind that banks do for their own profit, are in the works. Mortgage application forms will soon have to be written in plain English, allowing borrowers to more easily decipher fees and comparison shop. Larger down payments will be required of most homebuyers. If banks sell their mortgages to Wall Street, they’ll have to keep 5 percent on their books, an ever-present reminder not to extend credit to those who can’t afford to pay it back.

Naming Names

Later this year, a council of federal regulators will reveal which financial firms will come under special scrutiny because they are critical cogs in the world financial system. Some large hedge funds, insurers and asset managers ought to be in the mix, which by law includes the 35 or 40 largest U.S. banks, or those with at least $50 billion in assets.

Dodd-Frank won’t fix everything. Regulators are waking up to the fact that, whatever progress is made in ending the too-big-to-fail mentality, it will stop at the nation’s borders. To be effective, the so-called living wills that large financial firms must prepare in case they run into trouble and need to be shut down should be adopted internationally.

More Is Needed

Rules forcing most derivatives trades to be processed through clearinghouses, and backed by collateral, should also be accepted globally to avoid regulatory arbitrage, in which trading firms move to countries with the least intrusive, and lowest cost, oversight. Regulators need authority to peer inside the records of financial firms based in other countries, and not just the books of their U.S. branches. And the largest, most globally connected banks should be required to hold more capital than the 9 percent or so that U.S. officials are contemplating.

With the top 10 U.S. banks holding 77 percent of the industry’s domestic assets, compared with 55 percent in 2002, too-big-to-fail is an even bigger worry today. Thomas M. Hoenig, the Kansas City Federal Reserve president, has said that the incentives for risk-taking that existed before the crisis all remain in place. The difference is that, this time, regulators are on the case -- unless the Dodd-Frank naysayers get their way.

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