When financial reform was enacted last summer, its supporters in Congress called it the most ambitious piece of legislation aimed at the financial system since the Great Depression. Its sheer breadth was more than 2,000 pages, with new regulations designed to protect consumers against abusive lending, reforms for the mortgage market and safeguards to rein in banks that had long been called too big to fail.
But 11 months later, Dodd-Frank is tottering under the weight of intense political wrangling, missed deadlines and, perhaps most troubling, confusion over rules and definitions that have yet to be fully explained.
There were 26 deadlines for regulation explanations that were supposed to be met in April, yet none were reached, while 109 rulemaking requirements are due in July and stand little chance of being completed. These holdups have the potential to place large portions of the financial system into legal gray areas.
Much of this comes as a result of regulators, who have been tasked with designing rules to implement laws, who have struggled with insufficient budgets and who now under enormous political pressure from Republicans and Democrats alike. Meanwhile, lobbying efforts within the financial community are aggressively fighting the legislation in ways it ways it didn't dare attempt one year ago.
According to Bob Contri, who leads Deloitte's financial services industry group, there are three powerful forces at play that have created this landscape of uncertainty: an aggressive, perhaps unrealistic regulatory schedule; regulatory agencies had to be created, ushering in a new political process; and market participants, such as banks and large financial institutions, are taking a more vocal position today than they were the last two years.
"You have these three elements at play, and they're combining to delay the implementation even longer and potentially change some of the outcome," says Contri. "Some of the rules are mandated pretty specifically in what they'll look like, but others are subject to a fair amount of legislative involvement and rule-writing. I think this process is going to go on for quite some time."
The implementation of the law has seen three primary areas of concern: the Volcker Rule, Derivatives regulation and Credit Rating Agency regulation.
The Volcker Rule, which essentially bars federally insured banks from trading on their own account, or proprietary trading, has been held up by intense disagreement over dozens of complicated, but vitally important definitions. The Office of the Comptroller of the Currency (OCC), for instance, has been outspoken in pushing for banks to have wider latitude in making trades to balance and manage their assets and liabilities.
In the area of derivatives, Dodd-Frank stipulates exchanges should be used to render markets more transparent and regulated. But a large swath of its initial supporters, such as Senator Charles Schumer and Congresswoman Kristen Gillibrand, both New York Democrats, have expressed concern the law could impose significant competitive disadvantages on U.S. financial institutions.
"People underestimate the importance of global regulatory alignment," says Contri. "When you start to talk about a global capital market, and the way that capital flows very quickly and easily across international markets, making major changes to derivatives will impact this immensely. I think that impact was underestimated in the U.S. in the rulemaking."
Credit Rating Agency regulations also remain largely in flux, as many regulators have had to overcome the threat of severe budget cutbacks, many key positions at regulatory agencies still sit empty and various players have been lobbying hard to loosen the rules.
The SEC initially proposed making credit agencies liable for their ratings, following the dubious ratings system that helped set the stage for the global financial crisis of 2007 and 2008. But over the last month, the SEC has indefinitely tabled those provisions.
Now, all that remains is an underlying sense of uncertainty.
"The banks have accepted that this is the environment they're going to have to work within," says Contri. "Last summer, when Dodd-Frank passed, they were paralyzed and wondering what all this meant. I think they've recognized that this is how it's going to be for some time, and they can't afford to wait."
All of these disparate pieces are stitched together as one enormous piece of legislation once intended to touch nearly every aspect of the U.S. financial system. But as the realities of regulatory and political pressure take hold, all those sweeping reforms remain ever in doubt.