With the fifth anniversary of Dodd-Frank, you will hear a lot about the Obama administration’s commitment to financial reform. And you can certainly break down what the law did and find successes on discrete issues. But even supporters will agree that a financial regulatory law is only as good as the people conscripted to implement and oversee it. And so the Obama administration said more about their position on financial reform with a key nomination on the day before the anniversary than they did with any subsequent rhetoric.
The White House nominated Kathryn Dominguez, a professor of public policy and economics at the University of Michigan, to fill the final open seat on the seven-member Federal Reserve Board of Governors. Dominguez teaches a class called “Jane Austen and Economics” along with courses in macroeconomics and international financial policy. Her academic work focuses mostly on currency markets and foreign exchange rate behavior. The White House has touted her experience in global financial markets.
At a time when the euro remains in turmoil, an expert on currency markets could be useful for the Fed. (She appears to hold a negative view of a monetary union without fiscal integration.) And there are whispers that Dominguez is a dove on monetary policy, at a time when the board must decide when to raise interest rates in a way that doesn’t stunt the economic recovery.
But nothing is known about Dominguez’s views on financial regulation or consumer issues. Senator Sherrod Brown, ranking Democrat on the Banking Committee, was completely flummoxed to find much to say about Dominguez. “Dr. Dominguez has a distinguished academic record,” Brown said in a statement. “I look forward to hearing her views on how the Federal Reserve can continue to maintain and strengthen the policies that have stabilized the financial system and helped our economy rebound from the crisis.” Translation: She taught classes, but I want to know what she believes about financial reform.
To understand why reformers may be chagrined by this choice, you must know about the makeup of the Fed Board of Governors. As I wrote in the Prospect last April, particular seats on the board have been unofficially earmarked for certain coalitions and interest groups. The goal is for the board to carry wide experience in all areas that the Fed is involved with, from Wall Street to international banking. For example, when Elizabeth Duke resigned last year, lawmakers asked for a replacement to fill the “community banker seat.” Obama obliged by nominating Allan Landon, former CEO of the Bank of Hawaii, in January. (He has yet to be confirmed.)
Reformers were pleased that Sarah Bloom Raskin filled the “public interest seat,” as a former regulator focused on consumer protection. But she left in 2014 for the No. 2 position at the Treasury Department, replaced by Lael Brainard, a Treasury official from the Tim Geithner era and a loyal soldier for the administration’s viewpoint, which has tended to be more moderate on financial reform issues. When Jeremy Stein resigned last year, there was a chance to restore the “public interest seat.” But instead, the White House went with Dominguez.
Dominguez’s profile, as an academic with an international finance specialty, mirrors that of Fed Vice Chairman Stanley Fischer, and to some degree Chair Janet Yellen. The public interest seat has disappeared, giving Daniel Tarullo, the current point person on financial regulation, no allies on the board.
Though many consumer issues have moved into the Consumer Financial Protection Bureau, the Federal Reserve still remains an important regulator. Just this week, the Fed finalized a capital surcharge for the largest eight financial institutions. On top of the 7 percent capital ratio required of all banks—which means banks can only borrow $93 for every $100 they lend out—JPMorgan Chase would have to add an additional 4.5 percent, and the other seven mega-banks anywhere from 1 percent to 3.5 percent.
However, this rule doesn’t come into compliance until 2019. It also involves “risk-weighted” assets, giving banks a break from capital buffers on certain assets deemed less volatile, and reducing the overall capital needs. All of the banks except JPMorgan already have enough capital to satisfy the rule. Experts like Stanford University’s Anat Admati have called for much larger capital ratios, without risk weighting.
That reform perspective is absent at the Fed, and while Dominguez may have a serviceable record, she doesn’t bring much on financial reform. Meanwhile, the Fed has delayed sections of the proprietary trading ban known as the Volcker rule, and has continued to give outsized influence to anti-regulatory general counsel Scott Alvarez. The Fed has the opportunity through Dodd-Frank to actually downsize banks if they feel “living wills,” blueprints for how financial institutions can be unwound in a crisis, are inadequate. But they have soft-pedaled their response to initial living-will submissions—even as the FDIC has called them “not credible,” which legally triggers a revision process that could lead to forced structural changes.
In other words, the Fed could use another reformer, someone who sees his or her role as protecting the public from future Wall Street catastrophe. Dominguez, for all her talents, is not that person. And this reveals the administration’s posture on financial reform. They believe that Dodd-Frank solved everything, with no need to keep the foot on the gas. The Democratic presidential primaries have spurred debate over what additional actions must be taken to safeguard the system. Inside the White House, that debate is absent. And because the seven members of the board of governors can serve 14-year terms, that will have an impact well into the future.
The next financial crisis will look different than the last one, and in many ways, Dodd-Frank sought to fight the last war. Whether it’s excessive leverage in the shadow-banking sector, problems with still-unreconstructed areas like housing finance, or new frontiers of illegality that seemingly pop up on a daily basis, there are plenty of areas of concern. As the key national bank regulator, the Federal Reserve is the first line of defense. The White House vanishing its “Main Street seat” makes us all less safe.