The Death of Dodd-Frank: Banking Law's Dobbs Moment

Last year, I savored a bit of schadenfreude watching my con law scholar colleagues despair about their field after cases like Dobbs v. Women's Health Organization or West Virginia v. EPA. Con law scholars see themselves as the royalty of the legal academy, far above those folks who do blue collar law like bankruptcy and commercial law or grubby stuff like banking and money. And that's fine--we always laughed at them as slightly clueless toffs, not realizing (or wanting to admit) that their field is largely a battle of normative opinions, without any quasi-objective touchstone or clearly right or wrong answers. In contrast, we can point to things like express deadlines and numerical ratios that must be maintained and efficiency principles like "least cost avoider". That's what's made the Supreme Court's recent jurisprudence so delicious--it shows what every non-con law scholar has long known--that con law is as much politics as it is law. There was a certain joy in watching the con law field realize that the emperor had no clothes.  

But there's karma in the universe, and Silicon Valley Bank is sticking it right back the banking law scholars. I don't usually teach the core prudential regulation banking law class, but I really feel for colleagues who do. The response to Silicon Valley Bank is banking law's Dobbs moment. In 2010, in the wake of the 2008 crisis, Congress erected an enormous legal edifice to govern financial institutions--the Dodd-Frank Act. And we saw in the course of a weekend that it was all an expensive and wasteful Potemkin village. What good does it do to have a massive set of regulations...if they aren't enforced? To have deposit insurance limits...if they are disregarded? Dodd-Frank is still on the books, but its prudential provisions are as good as dead. Why should anyone follow its requirements now, given that they'll be disregarded as soon as they're inconvenient? And why should the public have any confidence that they are protected if the rules aren't followed? Indeed, did anyone even look at SVB's resolution plan or was it all a show? 

I really don't know how one can teach prudential banking regulation after SVB. How can you teach the students the formal rules—supervision, exposure and concentration limits, prompt corrective action, deposit insurance caps—when you know that the rules aren't followed? This is going to be a real challenge for folks who teach banking regulation. So, I invite our con law colleagues to snicker back at us. 

P.S. Anna Gelpern will say that I'm being naive--as she noted in a great 2009 article, the rules always get tossed out the window in financial crises and then there's a lot of finger wagging and new rules that are followed until the next crisis, when they aren't. And she's right. But the cycle of rules-crisis disregard-new rules had its own internal credibility:  this time I mean it! That internal credibility required there to be a certain time lag between crises, enough that a new king would arise over Egypt, who did not know Joseph, that is a new crew of regulators who could not be counted on to act the same way as in the past. When it's the same crew as from the last crisis, the internal credibility of "this time I mean it!" doesn't fly. 

Comments

[Bob Lawless]

Yeah, well I am a bankruptcy law specialist, and we still have rules. We scoff at the irrelevance of your so-called doctrinal rules in banking . . . wait . . . reading your next post about SVB Financial venue . . . never mind.

[Adam Levitin]

Bob, have you been reading my draft posts again?

[Anna Gelpern]

The real commitment problem is not government borrowers in countries on the periphery--it's financial regulators in countries at the center.

[Robert from yahooboard]

Credit quality at SVB seemed fine, it was the interest rate risk, 90% uninsured depositors, and old fashioned bank run sped up by social media that appears to be the problems.

Didn't the regulators have the appropriate tools to at least address 2 of the problems?

Professor Levitin, I thought your brief written and oral testimony in the SBC, “Housing Finance Reform: Should There Be a Government Guarantee?”
September 13, 2011
10:00 am
Was the BEST analysis ever written! Fantastic!

What are your thoughts about moving from an implicit federal government guarantee on all federal banks deposits to an explicit one? Probably stop bank runs but then there is the moral hazard and industry capture problems...