This second article based on the July 23 hearing by the House Financial Services Committee titled "Assessing the Impact of the Dodd-Frank Act Four Years Later" will look at the testimony of the witnesses other than former Rep. Barney Frank, D-Mass., and make some observations looking forward as to how Congress is likely to respond to the industry agenda presented in part by the witnesses.

A mini-agenda is taking shape in the financial arena. The industry is eager, even anxious, to get extensions of the Terrorism Risk Insurance Act (TRIA) and the Export-Import Bank by the end of the fiscal year on Sept. 30, but House Republicans demand at least token reforms.

A bipartisan consensus is forming that at least some changes to Dodd-Frank could be agreed to, but so many interest groups might be involved that it could be difficult to get anything through, either by the end of the regular session, in a lame duck session or in the new Congress. Frank explained that former Sen. Chris Dodd, D-Conn., was in charge of getting the 60 votes needed to get the bill through the Senate, and this entailed some regrettable concessions.

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Two witnesses at the hearing argued for provisions they favor to be included in whatever package eventually emerges. Another highly touted feature of the Act is called Risk Retention — the principle that risky mortgages could no longer be proliferated without someone in the chain of "securitization" assuming some of the risk. Frank expressed regret that this principle had been lost in the rulemaking process of the Consumer Financial Protection Bureau (CFPB) at the expense of community bankers like Dale Wilson of First State Bank of San Diego. That's San Diego, Texas.

Wilson and other rural bankers want the rules changed to allow them to return to making balloon loans to customers who have credit flaws, and with House Financial Services Committee Chairman Jeb Hensarling, R-Texas, and many other members with close ties to rural bankers on their side, the chances are good.

Thomas Deas, a corporate treasurer from FMC Corp. in Philadelphia, spoke for a group of original winners, the "end-users" of derivatives, who were supposed to be shielded from margin requirements on the ground that these are hedging transactions. Their complaint is that these costs are being imposed on them by banks, which are assessed capital charges. Deas and his colleagues object to having to post initial and maintenance margins, as any trader would have to do. Even hedging transactions entail risks and costs that someone has to bear, but the treasurers argue that these charges tie up funds that could better be used elsewhere.

In related testimony, Anthony Carfang, a longtime consultant to corporate treasurers, called for the abolition of the Financial Stability Oversight Council (FSOC) because he contended it has fostered a climate of risk and fear that is contributing to further consolidation in the financial services industry and driving up the cost of capital for industry as a whole. At the same time, he acknowledged that the risk created by financial activities always resides somewhere in the system. While it can be moved around, it never goes away.

Finally, Paul Kupiec, a resident scholar at the American Enterprise Institute, disagreed squarely with Frank and agreed with Rep. Brad Sherman, D-Calif., that the failing bank resolution provisions that proponents contend have ended the policy of "too big to fail" have instead reinforced the market's expectation that the federal authorities stand behind the too big to fail banks now and will bail them out when the next crisis comes.

(Archived video, the staff memorandum and witness testimony can be found here.)

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