In Perspectives, the editorial staff of financialregulatoryreport.com discusses pressing issues of the day with industry experts on a broad range of topics.
FR Report: In this edition of Perspectives, we sat down with Mark Oesterle, former Chief Counsel to the U.S. Senate Banking Committee, and recent addition to the Reed Smith Financial Regulatory team. Mark, tell us a little about your background before joining Reed Smith.
Oesterle: I served on the staff of the Senate Banking Committee as a senior counsel and chief counsel for a little more than a decade. In many ways, I experienced first hand the idea that the proverb “may you live in interesting times” can be both a blessing and a curse. I was directly involved with making the changes to the money laundering laws following 9-11; I participated in the multi-year effort to address the housing finance giants, Fannie and Freddie, and to reform the credit rating agencies; and then when the housing market finally collapsed, I had a front row seat for the financial crisis, TARP, and the entire process that led up to the passage of Dodd Frank. Interesting times indeed.
FR Report: Is the Dodd Frank Act doing more harm than good?
Oesterle: It is actually far too early to tell. Dodd Frank the law was passed last July, however Dodd Frank the policy that will govern our economy and the activities of financial institutions is still in the making. There are hundreds of rules yet to be written and thousands of new requirements yet to be put in place. While I have some sense as to the problems that the law is likely to cause, it has to actually take effect before we can assess its consequences.
FR Report: What do you see as the most harmful provision in the Dodd-Frank Act in terms of consumer financial products that Congress should re-assess?
Oesterle: Part of the difficulty in making pronouncements in this regard is that we have yet to see what problems the law will cause. While things like the new rule limiting interchange fees has proceeded further down path to final form, it is still not in final form. This makes it hard to judge what is “most harmful.” That said, generically speaking, the provisions that increase costs, decrease innovation, and provide little consumer or safety and soundness benefits will be the ones that win the dubious distinction of most harmful. There is also an interesting parallel to highlight here: Just as the public often gives “Congress” low marks but they think highly of their own Senators and Representatives, consumers also give big banks low marks but often think highly of their own banks or at least of the specific products they use at their banks. Customized account features and credit card capabilities are very popular. To the extent that Dodd Frank curtails the consumer’s ability to receive credit card program rewards or eliminates the convenience of free online banking services, consumers will take notice and will not be happy.
FR Report: Do you see any willingness on the part of Congressional Democrats to work toward an amendments bill to ease some of the regulatory burden created by the Dodd Frank Act?
Oesterle: While there has been some bi-partisan support with respect to addressing the interchange fee rule, not much consensus has otherwise developed. It must be noted that the extent of the “regulatory burden” of Dodd Frank has yet to be established because the rules have yet to go in place. A consensus will not develop around any particular solution until a particular problem or set of problems are identified.
FR Report: Some have said that the current budget battle in Washington could impede the agencies’ ability to handle their task in drafting the Dodd Frank Act implementing regulations. Do agree with this?
Oesterle: While the Federal banking regulators are not subject to the budget process, the CFTC and the SEC are and both have said that without considerable additional resources, they will have difficulty meeting their new Dodd Frank rule writing and oversight activities.
FR Report: At Capitol Hill hearings, the regulators have appeared somewhat uncertain as to how to define “systemically risky” institutions. What does this say about the Dodd-Frank Act and are we likely to see any legislative assistance or direction?
Oesterle: During consideration of Dodd Frank, staff and principals from the Federal banking regulators and from international financial regulatory bodies made it explicitly clear that systemic regulation was a significant departure from the principle of prudential regulation currently followed, and that it would require a great deal of work just to prepare to consider how to go about conducting it. The regulators will need massive amounts of data, new systems and additional staff simply to get to where they can start asking questions about the basics. When one factors in the fragile state of both the U.S. and global economies and considers that at its core, systemic regulation is about adopting measures that reduce short term economic activity in order to enhance longer term growth and stability, it is easy to see why there is uncertainty and even anxiety at this point in time. In light of this, it would be my guess that the regulators will move forward cautiously as they undertake to begin this complex regulatory mission.
FR Report: Last week Treasury Secretary Timothy Geithner told the Senate Banking Committee that “the financial crisis was partly the result of fundamental flaws in the housing finance market.” He also noted that among the government’s “primary roles” in housing finance should be “consumer protection and robust oversight.” Next week representatives from the Mortgage Bankers Association, Moody’s Analytics, and the Center for American Progress are also expected to testify before the Committee on housing finance reform. What do you think are the key housing finance reform elements that will be debated in the current session? While most of the talk has thus far focused on Fannie, Freddie, and the Federal Housing Administration, do you expect any reform proposals to target the Federal Home Loan Bank System?
Oesterle: I believe there is a basic understanding on Capitol Hill that the entire housing finance system needs to be carefully examined in order to prepare for comprehensive housing finance reform. This means that the GSE’s, the FHA and the Federal Home Loan Banks, among many other focus areas, will receive considerable scrutiny as this process moves forward. I believe that Secretary Geithner and Secretary Donovan attended the first of what will be many hearings on housing finance that will take place over the next few months.
FR Report: Do you think that the Consumer Financial Protection Bureau will be ready to hit the ground running as of the designated transfer date?
Oesterle: While a lot of work has gone into transitioning staff, setting up offices and coordinating efforts, I think that ultimately the readiness of the CFPB is directly tied to having its Senate-confirmed director installed by the transfer date. Leadership is vital to any organization but is especially important to new entities that are in their founding stages. I would guess that the Obama Administration will send a nominee to the Senate for this position in fairly short order.