The tipping point is coming. A critical mass of angst and dissatisfaction with the Dodd-Frank Act and Basel III is opening the door to change.
Industry executives should walk through it, extend a hand to policymakers and work collaboratively to improve the supervisory infrastructure governing their business.
If they don't, it will be a missed opportunity of enormous proportions.
How ripe is the moment? Even lawmakers who voted for the 2010 reform law are open to improving it.
"Congress never gets it right, when you're looking at massive reform legislation, the first time through," Sen. Mark Warner, D-Va., told The Hillnewspaper last week. "You directionally head in an area and then you come back, two years, three years hence to do a corrections legislation."
And a flood of letters from Capitol Hill is forcing the regulatory agencies to rethink the latest Basel capital rule.
The November elections are another natural turning point, regardless who wins the presidency. It's a new beginning with opportunity to make some changes.
Ammunition for anyone seeking change arrived Monday from Karen Shaw Petrou of Federal Financial Analytics.
Petrou, the sharpest mind analyzing banking policy today maybe ever has just completed a comprehensive, three-part assessment of the regulatory landscape (the three parts: Strategic Regulatory Landscape, Operational Impediments to Effective Financial Regulation and Assessment of Resolution Regime for SIFIs) Her stark conclusion: even if regulators did everything called for in Dodd-Frank, and did it perfectly, financial services supervision would still be a mess. Throw Basel III in the mix and it just gets worse.
The end-result of numerous agencies pumping out massive rules to meet statutory deadlines will be a tangle of contradictory mandates that will be tough to enforce and impossible to comply with.
Petrou concludes the regulatory agencies should step back and take a wide-angle view of their work and ask: what's most important and how are those rules connected to each other?
"The regulators need to look across the landscape, pick the near-term priorities, finalize those with an eye towards how each relates to the others and then move on," she said in an interview.
"Regulators need to go back to Congress and say, 'We want to do everything you said all at once but we can't. Here are our priorities.' And on issues like the Volcker Rule, they need to say, "Tell us what to do.' "
Topping Petrou's priorities are the rules relating to Too Big to Fail.
"First and foremost we need to finalize a resolution regime that ends Too Big to Fail because that is the driving determinant of what type of regulatory system we should have," she said.
"If big banks are Too Big to Fail you need one set of rules. If they are not, then another set of rules is appropriate."
Petrou devotes one of her three reports solely to this question, and concludes the orderly liquidation authority in Dodd-Frank should prevent taxpayer bailouts of financial companies. She applauds the Federal Deposit Insurance Corp. for the progress it's made to date, but her report catalogs, in detail, all the issues that still must be nailed down.
"Does it work? The answer is we don't know because it hasn't been tested, but built out as the FDIC is planning, it should," Petrou said.
She quickly adds a problematic caveat: "But it won't work if the regulators have no confidence in it."
That lack of confidence, she said, is leading regulators to weave a web of sometimes contradictory rules for the industry.
"Big banks are being regulated as if they are Too Big to Fail so they are squashed as effective intermediaries, business moves into the shadows and investors remain reckless because they think there is a safety net," Petrou said.
If you accept that Orderly Liquidation Authority will work, "then that argues for reviewing the landscape so that banks are regulated appropriately for safety and soundness purposes but not also as if they remain Too Big to Fail."
"Trying to do both is dangerous."
What Petrou is saying is this: end TBTF by making implementation of Dodd-Frank's Title II a priority. Once you have accomplished that you no longer need other rules like the capital surcharge for systemically important banks or bullet-proof liquidity standards or super-stringent limits on counterparties.
A related priority is the naming of systemically important nonbanks. The law threw every banking company with more than $50 billion of assets into that bucket but regulators have yet to designate any other types of financial companies.
"One of the best parts of Dodd-Frank is that we are still the only major financial market with a systemic regime for nonbanks except it's only on paper. I would prioritize that.
"I fully agree with the insurance companies that bank rules don't work for them, but we've had two and a half years now and I would say the industry has spent so much time fighting against it instead of coming up with something sensible."
Petrou would also prioritize all the rules designed to improve corporate governance. "I would really like to see a set of much more clear, transparent and accountable standards for boards of directors," she said.
The risk tolerances laid out in the Federal Reserve Board's proposal to implement section 165 of Dodd-Frank are a great start.
"This is a concept in which the board looks at the full array of risks a bank takes and in each key area says to management where are our risks and what are the scenarios that cost us how much? What are our core tolerances?"
Some industry critics may be rolling their eyes and dismissing Petrou as an apologist for big banks. Let me add a little fuel to that fire. Petrou was hired to write these reports by the Securities Industry and Financial Markets Association.
But I've been covering Petrou and her firm since 1987 when I started working for American Banker. Over those 25 years, Petrou has said plenty of things her clients didn't like, including after the 2008 crisis that the industry needed to be reformed.
Her website states: "We aren't analysts 'for hire' that is, we won't tell clients what they want to hear or ensure results can be made to appear from studies before methodology is understood and goals are road-tested."
I asked her what sort of input Sifma had in the writing of these reports, which Federal Financial Analytics has been working on six months.
"They never said 'change this.' They just said, 'It that right? And they had great questions," Petrou said.
There isn't room here to do these reports justice.
They should shape a new debate over how best to oversee the financial services industry.