With President Obama re-elected and Senate Democrats in the legislative driver's seat, the 2010 reform law is here to stay.
That's a good thing. But even better is this: with the election behind us, everyone — from bankers and their critics to lawmakers and the regulators writing the rules — can hit a reset button.
Bankers can accept that these rules will eventually take effect, and finally begin engaging in good faith. It's time to stop complaining and start explaining. Bankers can help the agencies write the Dodd-Frank rules in a way that curbs abuses without strangling credit or driving business costs sky-high.
Regulators, of course, need to listen. Not everything a banker tells them is suspect. Bankers know the business in a way regulators never can so it's important to take their input. I'm not suggesting the agencies let the industry write the rules. Far from it. These negotiations should be tough; every assertion by bankers must be questioned and verified.
But just because a point is made by a banker doesn't make it wrong.
We need both sides to come to the table and help write rules that make sense.
Dodd-Frank put us on the road to a safer financial system with the Orderly Liquidation Authority and the living wills. It strengthened supervision and is improving corporate governance via stress tests. It's plumping up the cushion against the next crisis with tougher capital and liquidity requirements.
All those rules make sense and are on their way to adoption and enforcement.
Dodd-Frank did some other great things that just haven't panned out as planned. The Office of Financial Research is a bust. It was supposed to gather the data needed to make some sense of our complex financial system, to help policymakers better understand the connections among the largest players. But it should never have been stuck inside Treasury, especially a Treasury that seems to have little interest in the office's realizing its potential.
The Financial Stability Oversight Council was another solid idea that isn't living up to its promise. I hope the next Treasury secretary takes this part of the job more seriously. How great would it be to hear the principals truly debate looming systemic risks in a public meeting? So far, all we've gotten are scripted performances.
The Obama administration needs to recommit itself to getting a Senate-confirmed director for the research office and putting some muscle behind the Oversight Council.
Two other items remain on the Dodd-Frank to-do list: the agencies need to finalize a streamlined version of the Volcker Rule and get the derivatives provisions in place. At that point, we should call a timeout and assess how the system is performing. From there we can figure out what else is necessary.
The industry would be wise to use this time to help itself.
Banks know (or should know) where their weak spots are, who their weak players are, what processes need improving. Instead of ignoring problems, or hiding them, they should go after them ahead of examiners. If a bank knows its compensation policies are still encouraging risk-taking, fix them. If a business line has a predatory bent to it, the bank should get out of that business or reform the practices.
This sort of change can start at the board level. Too many bank boards are simply packed with people loyal to the CEO. Directors should be independent and full of questions so they can really understand the risks a bank is taking.
A former regulator who didn't want his name used suggested a simple way to accomplish this: banks could require every board member to invest a certain percentage of their net worth in the company's stock. That would go a long way toward ensuring an engaged board.
A sound corporate culture is a close cousin to solid governance.
Bankers have got to find a way to convince employees that doing the right thing will be rewarded. They can't just talk about it. They have to show people by doing things like killing a product that may be profitable but just isn't "right."
More public leadership from the large-bank CEOs would go a long way. Executives are quick to argue that our economy and our nation's largest companies need big banks, but you rarely hear them talk about the challenges of managing a company with an asset size hitting 13 digits.
