Financial Regulation in the 21st Century: Risks, Challenges and Opportunities

Context & Trigger

• Financial sector stocks rose approximately 20% following the November 8 election, prompting Treasury Secretary Steve Mnuchin to attribute the gains to anticipated regulatory relief.
• The panel convened to assess the 10-year outlook for post-crisis regulations, specifically Dodd-Frank and Basel III, focusing on what is working, what needs change, and the feasibility of reform.

Legislative & Personnel Landscape

• Mike Summers (American Investment Council) noted that while 13 Congressional Review Act resolutions were signed into law, they targeted non-financial sectors; significant financial deregulation faces a difficult legislative path through Congress.
• The Financial Choice Act, aimed at replacing Dodd-Frank, is viewed as having low probability of passing the Senate, though Chairman Hensarling may pursue one-off legislative pieces.
• Implementation of significant deregulation is currently stalled by a "skeleton crew" of nominees; key agency heads at the SEC, CFTC, and CFPB are not yet confirmed, delaying policy execution.
• Changes to Senate rules allowing independent agency commissioners to be confirmed on a simple majority (51 votes) risk politicizing previously bipartisanship-regulated bodies.
• Patrick Cronin (BMO) suggested the confirmation of Justice Neil Gorsuch could eventually trigger the most significant regulatory shifts via Supreme Court rulings on Dodd-Frank provisions (e.g., MetLife, CFPB).

Regulatory Effectiveness & Critiques

• Neil Wolin (Brunswick) argued the pre-2008 framework was inadequate due to missing oversight on derivatives, shadow banking, and consumer protection, but acknowledged the current system may be over-engineered.
• Barbara Novick (BlackRock) characterized the regulatory environment as a "tsunami," noting thousands of pages of rules driven by wish-list items rather than crisis-specific needs, resulting in wasteful reporting (e.g., same data reported to 10 agencies with different definitions).
• Patrick Cronin noted that while the Volcker Rule had sound intent, its execution was poor, creating opacity between proprietary trading and market-making, and reducing market liquidity.
• Rob Lavitt (SoFi) highlighted that small banks (under $50B assets) face disproportionate burdens compared to large banks, potentially discouraging lending to local markets.
• Robert Lavitt pointed out that non-bank lenders face unique disadvantages due to fragmented state-by-state regulations and a lack of charter portability for online lenders.
• Patrick Cronin expressed concern that regulations like the Volcker Rule have merely displaced speculative risk into unregulated or less-regulated sectors (e.g., hedge funds, private equity) rather than eliminating it.

Specific Regulatory Pain Points

• Volcker Rule: Cited as excessively complex (900+ pages), involving five agencies, and difficult to supervise even for regulators; critics propose simplifying it into a bright-line test or repealing it entirely.
• Compliance Costs: Loan officers reportedly spend over 50% of their time on compliance tasks (forms, databases) rather than loan origination; some institutions submitted 30,000-page "living wills" yet were asked to provide physical copies.
• Private Equity: Dodd-Frank registration requirements for non-systemic private equity firms are viewed as onerous paperwork burdens, with calls for alignment with Venture Capital exemptions.
• Asset Managers: BlackRock cited the need to avoid being regulated as banks and highlighted redundant global reporting requirements across different jurisdictions (US, EU, etc.).
• Fintech/Lending: SoFi noted that risk retention rules for securitizations and the Volcker Rule's definition of "banking entities" inhibit non-banks from obtaining charters or raising capital efficiently.

Systemic Stability & Risk

• Consensus exists that higher capital and liquidity requirements have materially reduced the risk of systemic failure and taxpayer-funded bailouts.
• Neil Wolin warned that Dodd-Frank tied government hands by eliminating the Fed's ability to lend to single institutions and requiring Congressional approval for the FDIC's liquidity facility.
• The Financial Stability Oversight Council (FSOC) is praised as a necessary forum for regulators to share insights on cross-jurisdictional risks, despite criticism of its limited authority.

Future Outlook & Solutions

• RegTech: Patrick Cronin predicted an explosion in "RegTech" (AI, automation) to reduce the cost of compliance, particularly in AML (Anti-Money Laundering), suggesting technology can mitigate costs without full deregulation.
• Proportionality: Multiple panelists urged applying regulations proportionally based on institution size and risk (e.g., raising the heightened supervision threshold from $50B to $500B).
• Consolidation: There is a recurring call to consolidate the regulatory patchwork, specifically merging the SEC and CFTC and potentially consolidating the three primary banking regulators (Fed, OCC, FDIC).
• Global Harmonization: BlackRock advocates for standardized global reporting metrics to eliminate duplicate data collection across international regulators.
• Cautionary Note: Neil Wolin cautioned against swinging the pendulum too far back, noting that a catastrophic GDP contraction of 5-6% occurred pre-crisis, which dwarfs current concerns over regulatory drag on 2% GDP growth.