Dodd-Frank Reform: 'Crapo Bill' and Beyond

The future of financial regulator policy now lies with the agencies. So what should be on the agenda?

Last week, I had the chance to sit down with the Director of the Program on Financial Regulation at the Mercatus Center Brian Knight, Antonin Scalia Law School Associate Professor J.W. Verret, and American Banker reporter Rachel Witkowski to talk about Dodd-Frank reform in the context of the so-called “Crapo bill” and beyond. 

All three agreed that "modest" was an appropriate way to describe the 'Crapo bill,’ and that because this may be the last meaningful Dodd-Frank reform effort from Congress for some time, the foreseeable future of financial regulatory policy lies with the regulatory agencies and states.


  • Verret previewed forthcoming research by proposing “regulatory contracts” as a way to reduce regulatory uncertainty at the Consumer Financial Protection Bureau (CFPB) while talking about the states’ role in financial technology (fintech) regulation.
  • Witkowski highlighted her reporting on Mick Mulvaney (Acting Director at the CFPB) and his call for state attorneys general to take a bigger role in enforcement actions. She then pointed to housing finance as the next big issue in financial regulation that policymakers should focus on.
  • Knight noted that financial regulators should carefully consider the risks associated with regulating via broad discretionary powers rather than via traditional rulemaking, and discussed a federal charter and state regulatory sandboxes as potential policy reform options for emerging fintech firms.

The conversation also covered the Office of the Comptroller of the Currency (OCC), the CFPB’s ‘Project Catalyst,’ and the Volcker Rule.

Today's guests:

Follow Chad on Twitter @ChadMReese.

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

REESE: Welcome to the Mercatus Center Policy Download. I'm your host, Chad Reese. Congress is about to take a stab at small reforms to Dodd‑Frank. Once the dust settles on the Crapo bill, as it's colloquially known, it's probably going to be awhile before we hear from them again on the matter.

For the foreseeable future, in financial regulation, we're probably looking at regulatory activity at the federal regulatory agencies. What can we expect from them? Maybe more importantly, what should we expect from them, and what issues should be at the top their agenda?

To answer those questions, I've got a great panel today. First up, JW Verret, scholar here at Mercatus Center and a professor at the Antonin Scalia Law School. He also spent a couple of years on a tour of duty with the House Financial Services Committee as their chief economist. Good afternoon, JW.

VERRET: Chad, good to see you.

REESE: We've also got Brian Knight, director of our Financial Regulatory Program who's been described as a "wellspring of advice on fintech and brisket." Good afternoon, Brian.

KNIGHT: Good afternoon, Chad.

REESE: Last, and certainly not least, in our third chair, we're joined by Rachel Witkowski, reporter at the "American Banker." Our listeners may be most familiar with Rachel for her investigative reporting on the Consumer Financial Protection Bureau. Thanks for crossing the Potomac for us.

WITKOWSKI: Thanks for having me.

REESE: I'm just going to go ahead and start with the elephant in the room. I mentioned the Crapo bill briefly. It's what most folks in the fin‑reg world are talking about this week. It looks like the Senate is going to resume debate on the bill on Monday. JW, I know you've written briefly on this bill, in particular. Give me your 30‑second take on the good, the bad, and the ugly.

VERRET: It's a modest bill. I tried to think of the right analogy to describe how modest it is but they were all inappropriate. I'll just leave it at that it's a modest bill. Much of it is a good step in the right direction, get Congress used to the idea that Dodd‑Frank is not holy writ.

A lot of good, small changes there like extending the exam cycle from 12 months to 18 months, it's not going to change the world. It's a few things that are big in there, changing enhanced Federal Reserve supervisory authority so that some of the regional banks aren't hit by it that were hit by it before.

There's one piece of it that I just frankly don't agree with, which is the change in how they define a certain type of asset you have to hold. Basically, blessing government debt, state and local government debt as less risky. I would get the Fed out of doing that altogether, by the way, in favor of strong capital, like my colleague, Steph Miller proposes.

This piece of it is a little troubling, but overall, a good bill, very modest. Get people used to the idea that you can reform financial regulation and the world won't end.

REESE: Brian, how wrong is JW?

KNIGHT: No more wrong than normal.


KNIGHT: The slightly more pessimistic take on that is that this is kind of a wasted opportunity if it even gets over the finished line.

The House has to pass out the bill and they are making noise about adding some things, again, relatively small but were relatively uncontroversial things. You get the impression that the political environment in the Senate is this is how they can hold the coalition together and any change might split it apart.

The more pessimistic thing is it is relatively weak tea. While JW is right that it's good to break people of the habit that Dodd‑Frank is holy writ, the other thing is they can say they reformed Dodd‑Frank now. The next time someone comes along and says, "Hey, we should reform this part of Dodd‑Frank," like "We've already reformed Dodd‑Frank, silly, moving on."

My concern is as this moves forward, we're not going to see Congress really taking up any sort of fin‑reg issues for a while. We've done that. We've spent the capital on it. We're exhausted. Let's move on to something else.

REESE: Rachel, you were nodding a couple of times there. Did you want to jump in?

WITKOWSKI: Sure. Without taking sides, one way or the other, I think the Republicans in the Senate know that they have to be able to pass something that Democrats will get on board with. Modest was a great definition of it. That's probably the only thing, if any, that's going to get through is the basic bare bones, which I find interesting.

When the Trump administration came on board, there was so much talk about deregulation. I know in the House, they really wanted to revamp Dodd‑Frank further but that's just not going to happen in reality. It'll be much harder if they wait until the next election season.

REESE: You teed us up there by mentioning the administration. I'm going to just throw a jump ball for anybody who wants to get us started here. I mentioned earlier, looking at next steps, a lot of this is probably going to be in the regulatory agencies wheelhouse. Which regulators matter? What issues should they be thinking about? Where are you all focused right now?

KNIGHT: No one wants to take this jump ball, so I guess I'll fall on it. All the regulators matter if you're regulated by them. Let's back up for a second. One of the things that was interesting about Dodd‑Frank ‑‑ and you can argue bad about Dodd‑Frank ‑‑ is it gives the regulators a ton of autonomy, and a ton of discretion.

OK, they're the experts. They're the eyes on the ground and we don't want to step in their way. Well, OK, there are good government arguments against that because they're the unelected fourth branch of government. Also, you're going to see the problem of different regulators using their discretion in different and perhaps inconsistent ways.

We see that with Mulvaney at the CFPB, where I would certainly argue that Mulvaney is moving the agency in the right direction in a lot of ways. The agency came out so incredibly progressive that a lot of this is just regression to the mean. It's just moving back to mainstream American politics. There's no guarantee that Mulvaney is going to get it all right, or is going to build a durable policy stand.

Whoever his successor is, when and if they name a permanent director, and the next person who comes in, the CFPB Director, in a hypothetical Kamala Harris administration, is going to look pretty different. They're going to use that discretion in a different way and it's going to swing back the other way.

What we're going to have is four‑year swings potentially and that's probably where your preferred policy outcomes are. The swinging is suboptimal.

VERRET: There are two things I'm watching, and I agree with Brian. It's interesting that one of the things Dodd‑Frank did was it gave the discretion and opportunity to a Republican administration to change Dodd‑Frank. The regulators have the discretion. That means you move the needle in huge ways-

REESE: That's a good point.

VERRET: -when the administration changes. That's what happens when you give discretion to the administrative state. Don't forget, Justice Scalia started agency deference because he liked Reagan administration deregulation. He had more principled reasons but it also happened to help Reagan administration deregulation.

I'm watching two things. I'm watching the CFPB. I'm working on maybe an article, maybe an op‑ed, maybe a comment letter of the CFPB, but something, generally under the idea I have.

If you're listening, don't want to ruin the paper for when it comes out, but the key, the number one thing for CFPB reform regulatory contracts. It's a brand‑new idea. Nobody's thought of things this way. EPA's done this a little bit in some weird ways.

There's a case called "US v. Winstar" that holds the OTS. Back in the S&L crisis, the OTS tries to sell off some bad banks. It makes promises about how it's going to regulate in the future then the law changes. U.S. Court of Federal Claims comes down and says, boom, damages anyway. OTS, you promised regulation would be this way. You took the risk the law would change.

CFPB could enter into regulatory contracts with regulated parties that would result in damages for those parties if CFPB changes under a future administration. I'm talking about in legitimate ways, that just narrow abuse of discretion in the future along the lines of not going past the envelope that the Acting Director's talking about. Look out for that, Chad, that's coming.

I'm also watching Volcker, how are these agencies going to change Volcker together because five of them enforce it. If you can get all five agencies on the same page that's harder to change in a subsequent administration. Yeah, the regulatory state is where all the action is right now.

WITKOWSKI: I agree with the CFPB would be my number one. The attitude has changed so quickly there. They're the newest agency, right? It's like watching a child grow, learn and try to capture all these different things that go on in their life.

You have this agency that started out with the attitude of, OK, bank regulators, you didn't capture the financial crisis before it hit. We're going to do everything right and you did everything wrong. Now there's a different perspective on now we have to revamp everything within the agency to do it to our perspective under new leadership.

I'm really fascinated in how they're going to patch the relationships with the other agencies. You have so much change going on with all of the agencies. In FSOC also, there's going to be all new leaders there that have to look at systemic risk, and that's a huge task. It was before, it will be in the future. How they decide to watch systemic risk is going to be key for our entire country and overseas.

KNIGHT: To piggyback off that, one other thing that we're seeing in the Mulvaney interregnum is that you had an agency that was just jealously hoarding power and now it's trying to push it out. It's going to the state AGs and saying, well, you know better than us. We will trail behind you. It's going to the bank regulators. There's no reason we both need to supervise this bank.

You supervise, and if something comes up, let us know and we'll get engaged. It's hard to tell how much of this is just a different political philosophy versus how much of this is an effort to establish norms, so that when the CFPB comes out of this period, even if there is a more activist director, the norms are that it is a more humble agency because the state AGs and the other regulators have gotten reacquainted to being primary, or what?

The second question is, is this ultimately a good idea or is this missing an opportunity to provide durable reform? Because maybe the next director comes in and says, "Yeah, yeah, yeah. You know what? We're back. We're the dominant player. Everyone step aside again," instead of maybe...

The argument I would make about the CFPB or one of the arguments I would make about the CFPB is they should be doing more rulemaking, not less. But what they should be doing is defining the scope of their power via rulemaking rather than via enforcement, via consent order, via how far can we push the court, how far will the court let us go.

Instead come in and say, "Dodd‑Frank gave us a ton of power. Due process demands that we let you, the regulated entities, know what we think this means ahead of time so that you know how you're bound. You can sue us over it if you think we got it wrong without being in the middle of an enforcement action. So we're going to do go do rulemaking."

That's what were it me, and it isn't and no one asked me. But that's the path I would try to go do is what does abusive mean? Let's do a rule. Even if we can't say what it is, we can certainly say what it isn't. We can provide safe harbor at least.

REESE: Brian, if I had a regulatory agency, I would ask you. I just want you to know that.

VERRET: Brian is on the CFTC's advisory committee.

REESE: That's true.

VERRET: They go to him for advice.

REESE: You have been asked. That's true.


REESE: Just by a different agency. I do want to...I guess first I should pause and make sure that all of listeners know when we say CFPB, we're talking about the Consumer Financial Protection Bureau. We're in alphabet soup world when it comes to federal regulatory agencies. But I think that's one you can remember for the rest of this conversation. It's probably going to come up again.

I do want to bookmark systemic risk and Volcker which have come up a couple of times.

But you mentioned, Brian, talking state AGs role, the state attorneys general, and Mulvaney. Rachel, you just wrote about this at the end of February. So I want to kick it back to you. Can you just explain what Brian was talking about there? What's the relationship between the CFPB and state attorneys general?

WITKOWSKI: There was a rift last year and I guess previous years where the CFPB had went forward with enforcement actions that some of the state AGs did not agree with, in particular, with tribal lenders, payday‑type lending.

Mulvaney when he was speaking at that conference, he said he was looking back at these cases. He's going through all the cases to see if they were justified and if they could actually win a case in court. He pulled out of that one because why would he take an action when the own state authorities disagree with it?

I think he's trying to be more methodical about what he's doing with actions. Whether that's right or wrong we'll see in the future. It was interesting because the previous director of the CFB was also an Ohio state AG. I remember going to the other conferences where he spoke. Everybody knew him. They liked him. I was really curious if Mulvaney would get the same reception.

I think because he went in saying, "Hey, guys, go ahead and proceed with what you're doing. If you need resources and help, we'll back you up, but we're not going to overstep our bounds in working with you." I remember just sitting in the back and an audience member being like, "Oh my god, that was really good. We like him."


WITKOWSKI: There was some hesitancy by some of the Democratic AGs. But for the most part, he definitely charmed them and walked out there with a joke about drinking with an AG. He was really good at easing his way in.

REESE: Did he bring doughnuts?

WITKOWSKI: He did not bring doughnuts. He didn't bring alcohol either. I thought maybe there would be beer afterwards. [laughs]

REESE: Missed opportunity.

WITKOWSKI: Since we talked about beer. He opened with beer and margaritas. I think he's trying to change the tone.

I will say towards the end of Cordray's reign, he was trying to ease the relationship with the regulators because they did come in hard and strong. They weren't working together on exams, it was well‑known. I know they were trying to mend that, but I think with Mulvaney there, it's going to be a much faster shift towards working together.

REESE: This is an important shift because I know that both Brian and JW have written on this relationship between federal and state governing entities when it comes to financial regulation, specifically fintech or financial technology. Do either one of you want to jump on that topic and explore a little bit more?

We talked about maybe Congress doesn't have a whole lot of work ahead of it but federal agencies do. Now it sounds like maybe states are also in this mix. What role do states play? What role should they play?

KNIGHT: Go ahead.

VERRET: Where states...Brian's the expert. I just got a few lessons from state corporate law that I think we can try to use in state role in fintech. One of them is that this works best when a state that charters an entity has an incentive to enforce so that the enforcement is a value add to the value of the entity.

This works worst when, let's say for example, you have a long history of state AGs in a large state that have gone on to become governor and ran on their record, suing, bringing questionable actions against really rich Wall Street people, [clears throat] Spitzer. It's totally an externality where you're just not internalizing the damage you're doing to the financial industry.

I would say this works best with a 50 state passporting system where Delaware, North Dakota or New York, whatever, creates a state‑chartered fintech firm. That state‑charted fintech gets to be regulated by one state. Everybody knows that one state regulates.

That regulation stays within that one state other than some very basic consumer financial protection laws maybe at the federal level, but nothing like what we see now. Preemption can help because preemption can help to foster a 50 state passporting system. You've got to internalize it with matching chartering with enforcement. That's my key takeaway.

REESE: Brian, I know you're chomping at the bit just to make sure we're all on the same page. When we talk about fintech firms, we're talking about these financial institutions that are maybe a little nontraditional. A lot of them rely almost entirely or largely on the Internet. They might give out loans or they might look like banks or they might provide other financial services.

KNIGHT: I think for these purposes, the important thing is that they are not banks because if you have a banking charter, federal law gives you a lot of capability to operate on a national level. Even a state‑chartered bank under federal law, they can make loans on the basis of their home state interest law nationwide.

The problem for these non‑banks is they don't have that. They have go either state by state by state or they have to go partner with a bank. There are litigation and regulatory efforts to frustrate that partnership. It creates a lot of uncertainty and a lot of question about whether or not these products can move forward.

I think JW is absolutely right. But the challenge is I think I am less optimistic about the possibility of the states doing it on their own. I think you're going to need most likely some sort of federal action.

Now the OCC's been talking about a charter. We'll see if that moves forward. That's a pure federal system. That is a nationally chartered bank. You don't necessarily need that, but I think you're going to ultimately need something.

Even if all the states got together and agreed that we're going to accept passporting, let us sing kumbaya, within a year or two, you're going to have firms in the state coming in and being like, "Look, we know we're good. But those guys across the border, they're monsters. You really need to...I'm not saying keep them out. I'm just saying we need to hold them to a different standard."

Over time, the standards are going to drift. You're going to be right back where you were. The advantage of federal preemption effectuating state law is the states still have the incentive to compete on law because they want to come up with good law that people will want to use. But they don't get to erect barriers to trade.

Lest I come off as totally anti‑state, there is another area in fintech where I think the state really could play a big role. That is the regulatory sandboxing thing. It's the clichÈ of laboratories of democracy, etc. That's an area where you can have 50 different laboratories run a little bit different so long as all the customers are in the state and the company is in the state.

You don't have to worry about another state coming and saying, "Well, I don't care how you do it. That's a violation of our law. You're all going to jail." The challenge there then becomes but there's still this federal overarching regulation.

That's something where I do think, say, the CFPB could play a role in coming in and saying, "Look, if you're doing something as part of a federal regulatory sandbox, if there are appropriate safeguards in place to make certain that the customers trying it out are being protected, we're not going to come after you. We will defer to the state on this matter, so you can have confidence."

Depending on the nature of the product, you may to go get that from other entities as well, the DOJ or the banking regulators or something like that. But the CFPB has probably been the toughest nut to crack on that. They're the ones who have the most direct consumer protection power because in a sandbox situation, that's your concern.

You're not concerned about systemic risk. These are all tiny little experiments. This is not going to blow up the world. You're not concerned about safety and soundness. Again, tiny little experiment. Your company shouldn't fail on the basis of it, certainly not if you're a bank. If you're a start‑up and your company fails on the basis of the experiment, that's what start‑ups do. Lesson learned.

It's all about is the consumer going to get hurt because of a violation of the law. That's where the CFPB really could do a major step in terms of furthering innovation.

REESE: I think this gives us a good opportunity to maybe shift back to federal regulators. The Office of the Comptroller of the Currency or the OCC came up a couple of times. Rachel, I know that that's one of the agencies that you cover in a lot of ways. I'm just wondering what's your take on either their relationship to fintech regulation or what are there other priorities they're working on right now?

WITKOWSKI: The past Comptroller of the Currency, Thomas Curry, was the one who started to look at some sort of special purpose charter for fintech firms to bring them into the banking system. That seems to be held off as we go into a new leadership with Joseph Otting. From everybody that I've talked to has said even though he hasn't talked a lot on it yet that he will pursue it in some way.

We just don't know what way, but there is this perception that all of the regulators that are coming into place right now, are expected to come into place, would be friendlier to fintech. I don't know how that's going to play out. I haven't gotten a whole lot of direction. I do think the OCC had started the biggest lead on a federal banking charter for fintech.

It would behoove them to pick it back up especially since they are the national bank regulator, it makes sense. I also agree with Brian. A lot of these fintech companies in some way or another will be in touch with the consumer. There's a lot of opportunity for the CFPB to pick that up. I think they only have one no action letter that they issued. It's been quite a while, at least a year or two, since they offered that.

They also have Project Catalyst that they had worked with a few companies. They have the people. They have the ability to also get in there. I think a lot of people are waiting to see what happens under the new leadership.

REESE: What is Project Catalyst?

WITKOWSKI: Brian, you might want to help me out on this. [laughs]

KNIGHT: Go ahead.

WITKOWSKI: It's been so long too. I feel like it's been three years. I've had two different jobs since then.

REESE: This is like somebody asking what blockchain is or what Bitcoin is. There are seven different descriptions or definitions you could give them.

WITKOWSKI: Yeah. I remember when Project Catalyst first came out. There were three different concepts that they were trying to combine into it. But it was basically just to work with more fintech‑like companies on things that they were doing. They were trying to get more involved.

I do know that the companies that they worked with that I've been talking to, there's still a communication going on even under the new leadership. The CFPB is just basically collecting data and collecting consumer data to figure out what these companies are doing, how this benefits consumers.

Without getting too much in the weeds, Project Catalyst became a hodgepodge of ideas that they put together in the end to foster innovation. It's been two or three years now, and there hasn't been a whole lot of word on it in a while.

I think only three or four companies were involved at the time. There were things that were left hanging probably just because so much else was going on. Even now, Mulvaney is completely restructuring enforcement and supervision which are much larger departments. I think this has been left a bit on the back‑burner. But I would imagine, within this year, something would start to come out I'd hope.

VERRET: The skeptical way I've heard Operation Catalyst described by folks in the industry is the message was, "Come to us. Tell us your plan. We cannot promise we will not use what you tell us against you in an enforcement action. We cannot guarantee that we'll be bound by any guidance that we give you."

It could be you jump in the sandbox. There's a giant bear trap underneath the sand right after you get there.

REESE: There's maybe just a little bit of tension between industry and the regulators on...


VERRET: Perhaps. That can change with tone at the top under a new administration for a little while. To make that sandbox successful at the CFPB, to make Operation Catalyst successful, what I'm proposing is, again, this is one area where regulatory contracts bound by the holding in US v. Winstar is the way to go.

These are the rules that will apply to you. We will apply them fairly. If we do not, go to the court of federal claims and collect a check.

REESE: We're back to Brian's earlier point about discretion has got its benefits. But maybe there are some areas where the federal regulatory agencies could clarify some issues for innovators.

VERRET: And they could be bound by the rule of law.

KNIGHT: I think what we're going to have to see on the CFPB is to what extent is the change in the tone at the top basically to be...If you talk to the cynic, if you talk to the people who are really worried about Mulvaney, it's, look, he's smiling and saying, "Nice dog," while he looks for a big enough stick. He's going to gut the place because he just doesn't think it should exist.

The less cynical view that may come out is, "Look, there's a positive vision for a CFPB." Our colleague Todd Sawicki had a very op‑ed about this. I would argue there is a completely consistent Trump, conservative, populist vision of the CFPB which is basically like you, the average consumer, know what's best for you.

You know your life better than anyone else. It's our job to go after the people who are trying to prevent you from doing that because they're defrauding you. We believe in markets. We believe that people make the best decisions if they know what they're getting themselves into. It's our job to make certain that someone trying to lie to you gets got.

It's perhaps a vision. I'm workshopping this. I withhold the right to change it. Do you view the market as a garden or a forest? The garden is the gardener chooses what is and is not there. The forest, nature chooses. What do people not want? What do people need? What works better? What is technology doing? That doesn't mean you don't have someone watching over to capture the poacher.

Is the CFPB to be a gardener or a forest ranger? Still, like I said, workshopping it.


REESE: You heard it here, folks.

KNIGHT: If there is a positive vision of an active CFPB as forest ranger where if I'm Mulvaney, and I'm not and no one asked me, I go to my enforcement folks and, "Look, find me a fraud, like an out and out fraud, not some edge case, jeez, if we squint, a fraud. I want their head as an ashtray, metaphorically."

REESE: Thank you for clarifying that.

KNIGHT: CPFB doesn't have that much power, yet. I think that's a way to do it where you're like, "Look, there is a role for a CFPB, but it's not to substitute its judgment for that of the consumer."

VERRET: Here's a Thanksgiving Day conversation I've had with folks outside of Washington to understand the CFPB that I hope, think, clarifies the debate.

First, we talk about, "Do you think there should be a consumer financial protection bureau?" Everybody at the table says, "Yes! Of course, there should be." I say, "Should they have the power to go after abusive products?" They say, "Yes! Of course, it should be."

I say, "OK, now I've got you. What if I were to tell you that one of their big abusive cases, the use of solely their new abusive authority, was a case in which they said, 'You included a term in the contract. That term was not on page one. It was on page 100 of the contract. Therefore, it's abusive because it was not on page one.'"?

They said, "That's absurd! An agency can't do that." I say, "Oh, but they can." That's CFPB overreach.

REESE: That is a great point. Also remind me never to have dinner with you, JW, as lively as that conversation topic sounds.

VERRET: Sorry, I talk fin‑reg a lot.

WITKOWSKI: To JW's point though, I remember years ago there was a case. I don't remember all the details of it, but it related potholes that were not filled in a community. I had never seen essentially financial regulator go after potholes. I had thought, "Well, this might be overreach, but also it could be an opportunity for all of us to have our potholes filled-"

REESE: There you go! [laughs]

WITKOWSKI: -so I really didn't know from a consumer standpoint if this was necessarily overreach or beneficial. It is sort of that moment of why are you guys looking at this when you have Wells Fargo where there was activities going on for years? It now just came to light.

VERRET: They missed the boat there. OCC was ready to levy an $85 million fine. They came and they said, "Oh, we want $100 million fine." The only thing I can see for why they chose that number is that it was a nice round number that was bigger than the OCC's fine. That's it. They missed the boat on that.

REESE: I'm glad you brought us back to the OCC because I did promise that we would get back to Volcker if only briefly. Another jump ball since I know it's been raised, the Volcker rule is one of the other big Dodd‑Frank reforms that's been targeted in the past. There's been reform legislation proposed. A lot of it is in the agency's hands.

Want to get the panel's thoughts. Anybody have views on what regulators should be doing with Volcker? Is it fine as is? Should it go? Should it be reformed?

VERRET: It's a bad idea. But it's going to take a long time to change statutorily. There's just no pathway any time in the near future. But absolutely right now banks don't want to engage in prop trading anyway because of the capital requirements that would apply to them under the Dodd‑Frank rules.

REESE: By prop trading you mean proprietary trading-

VERRET: Making their own bets.

REESE: -which the Volcker Rule prevented.

VERRET: The underlying logic is flawed. The underlying logic there is that banks get into more trouble when they trade securities than when they make loans. That's completely idiotic. I'm sorry. There's no other way to describe it. Either way, you can be exposed to bubbles in real estate. They can take your bank down.

Making traditional bread and butter loans of 30 years and either holding them or selling them to somebody else and getting a piece of that portfolio. Anyway, they're not systemically less or more risky than the other. They're both about risk. Banks manage risk. They take risk. They try to manage that risk. That's what they do.

Post‑crisis, the ability of banks to do some trading and trading desks to do some banking was helpful because we could get banks to buy failed investment banks. We could get investment banks to buy failed commercial banks. It's a crazy idea. It's going to take forever to change it. It might be with us forever.

I'm going to be teaching banking long into my 90s. I'll probably be teaching Volcker then.

In the short term, we can some small fixes. I think Randy Quarles is the guy to it, the new vice chairman of the Fed for supervision. He's leading the charge. It's going to be about getting the agencies to at least coordinate better and maybe picking a lead agency that says, "Look, this is how we see this," and then the other four fall into line.

KNIGHT: Nothing really to add to that.

WITKOWSKI: It was well said.

REESE: No other thoughts on Volcker then.

I'll just throw out a freebie here for everyone. We've hit on a lot of different topics. We've talked about discretion, rule of law. We've talked about the relationship between the CBB and the states. Talked a little bit about the Volcker Rule. Whether it's Congress or the agencies, you're all experts in this field. What would you, yes, even you, Brian-

KNIGHT: Turn around.

REESE: -advise if a Congressional staffer or regulatory staffer came to you maybe over a beer and said, "You know, we've got, after this Crapo bill thing, no idea where we're going next. What should policymakers think about as the next big target?" Whatever they do with it, how would you help them identify the next priority?

KNIGHT: The thing I would ask them to look to is what is going to increase innovation and competition in the market for financial services? Because innovation, competition and entry, one thing we haven't really talked about is the number of community banks and all of that.

How do you get more competition and more different competition into the space? Because that's going to ultimately be protective and beneficial to consumers. What matters is the consumer being able to fulfill their needs in the best way possible. That's what our North Star should be.

VERRET: I would add to the points about innovation and competition. I would add just a related point to that, which is the importance of heterogeneity and diversification in our regulatory approach. By that, I mean, right now, the main problem with our regulatory approach is our financial intermediaries fund themselves in the same way. They invest in the same stuff. Regulators encourage it.

That just means that when they fail, they all fail at the same time. That's a terrible way to design a financial system! Much better approach is they all fund themselves in different way. They buy different kinds of stuff. They compete with each other.

By the way, part of this discussion, we haven't talked about safety net yet. The more you repeal the safety net, the more you get market discipline. Market discipline is a good thing. That's what we talk about a lot at the Mercatus Center.

I would heterogeneity. This is a principle embodied in Jeb Hansarling's Financial CHOICE Act which creates a new approach to bank regulation that has strong capital. It's embodied in the fintech competition stuff Brian's been talking about. Heterogeneity and just diversifying your...

Don't put all your eggs in one basket. We put all our eggs in the Basel basket basically. It's terrible. It's going to kill us at some point in the next couple decades.

REESE: Thank you for that cheery note, JW.

WITKOWSKI: I'm going to pick a heated topic that everybody talks about but it's never fixed [laughs] formally-

REESE: Oh good.

WITKOWSKI: -housing finance reform.

VERRET: Do we have another hour?

REESE: I'm going to keep you all here. Somebody pick up a six pack.

VERRET: Call Peter Wallison too.

WITKOWSKI: Everyone has something to say about it. But it feels sort of like that silent ticking time bomb. If we can actually fix it and address it faster, we're not going to run into a complete crash like we have in the past. But I just don't have a lot of faith. I'd love to really get down in the weeds with whoever it is to try to make these decisions and agree a lot faster.

REESE: This is what I like about getting a group of financial regulatory policy experts together is you're all so optimistic about the future. I get to hear about all the ticking time bombs and the ways in which the economy is going to be destroyed within the next decade or two.

KNIGHT: Just buy Bitcoin. That's the key. No, I'm just kidding.


REESE: That's not an official endorsement.

VERRET:  That's not investment advice, people.

REESE: I am going to close this out here. But I want to thank you guys for joining me, for having a great conversation. If I can try to pull together some of the things that we talked about, I will raise my beverage in a toast and say here's to financial innovation, competition, and access maybe. Can we all agree with that?

KNIGHT: Here, here.

VERRET: We can.


REESE: Great. Since that does it for today, I will note if you're interested in the latest on the Crapo bill that we mentioned at the beginning, I'd encourage you to check out JW's recent piece on the bridge. It's a nice summary of what's in the bill. JW, where can folks find other work of yours online the easiest?

VERRET:, SSRN, or just Google my name.

REESE: Great. Brian, where should folks go to find your latest takes on barbecue and banking?

KNIGHT: I'm on Twitter at though I've been trying to cut back for Lent, not entirely successfully.

REESE: Rachel, for our listeners who want to read more of your reporting, what's the easiest way for them to find it?

WITKOWSKI: You could go to American Banker's website or follow me on Twitter @RachelWitkowski.

REESE: As always, I'm eager to hear from you our listeners. Please email me your questions, comments, complaints, and/or episode ideas at [email protected] or find me on Twitter @ChadMReese. Thanks for listening.


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