Is Wall Street reformed?

Four years ago, President Barack Obama signed a massive bill meant to ensure that the U.S. would never again experience the kind of financial meltdown that began devastating the country in 2008. But the process of implementing the Dodd-Frank Wall Street Reform Act has proven far thornier than lawmakers had imagined, fueling criticism from supporters and detractors alike. Here’s a look at the state of Wall Street reform:

1. Only half of the new rules and regulations have been finalized. Dodd-Frank includes nearly 400 new rules intended to make the financial system more safe and sound, governing everything from derivatives and credit-rating agencies to mortgage lending. But to date, only 52% of the rules have been finalized, according to an analysis by law firm Davis Polk. “The law is messy, and implementation is even messier,” said Anat Admati, a professor of finance and economics at Stanford.

Why has the process taken so long? The law only serves as a blueprint for federal regulators, who are tasked with drafting the actual rules, unveiling them for public comment, and then finalizing them. The process has dragged on as the regulations have proven to be more complex than anticipated, and as lobbyists and other stakeholders have inundated understaffed regulatory agencies with comments. About 45% of the deadlines written in the law have been missed so far, according to the Davis Polk study, and 24% of the new requirements haven’t even been proposed by regulators yet. That’s increased regulatory uncertainty for the financial institutions who have to comply with the new rules — though some industry players are prolonging the process themselves by lobbying heavily against the new regulations.

2. It’s still unclear what the broader impact will be for banks and the financial system as a whole.The delays in the implementation process have made it even harder to predict what the long-term impact will be on the financial industry and ordinary consumers. New mortgage lending rules were put into effect in January, for instance, but it’s too early to determine how the new requirements for lending will play out, and what changes are actually linked to Dodd Frank itself, policy experts say.  “As far as Dodd-Frank is concerned, much has changed in terms of bureaucracy and procedures and yet it is debatable whether or not there has been fundamental change to the financial system,” said Cristian DeRitis, senior director at Moody’s Analytics. “To the extent the financial system has changed, it is debatable how much of that change has been driven by Dodd-Frank versus the financial crisis itself.”

3. Consumers have new protections, but there are ongoing legislative and legal challenges to many of the new regulations. The creation of the new Consumer Financial Protection Bureau has given ordinary Americans a centralized place to file complaints and get information on financial products. It’s also heightened oversight of non-bank financial entities like mortgage and student loan servicers, debt collectors, and payday lenders. But the CFPB has also been the GOP’s favorite target: The House has proposed at least 30 bills to dismantle part of Dodd-Frank, criticizing the law for regulatory overreach and for failing to prevent future bank bailouts, Of those 30 bills, 10 specifically target the new consumer watchdog, according to Center for Public Integrity. Parts of the law have also being challenged in court, and some have already been blocked.

4. There’s concern from both the right and left that the law won’t do enough to prevent future bank bailouts. There are some major ways that banks have already changed their behavior to comply with the law, shedding certain assets, building up stronger capital reserves, adding risk-management staff, and slowing credit expansion. But critics across the ideological spectrum argue that the law still doesn’t do enough to prevent a “too big to fail” scenario and future bank bailouts from happening. 

Under Title I of Dodd-Frank, big banks are now required to submit “living wills” to the Federal Reserve to explain how they’d be liquidated if they failed, but officials have yet to force major changes because of them. “Can you honestly say that JP Morgan could be resolved in a rapid and orderly fashion as described in its plans with no threats to the economy and no need for a taxpayer bailout?” Sen. Elizabeth Warren recently asked Fed chair Janet Yellen, who did not directly answer the question. Some legislators have proposed new laws that do more to prevent a “too big to fail” situation. But Admati, the Stanford professor, said regulators simply need to be more forceful in enforcing the existing ones. “We don’t need a new law. We need regulators to have the political will to implement the laws,” she said. “They have the authority to regulate the funding mix of the banks and even to break them up under Title I.”

5. We’ve eliminated some of the causes of the last crisis, but that doesn’t mean we’ve prevented the next one. The toxic mortgage products that led to the last financial collapse have been all but eliminated from the marketplace. If anything, policy experts and advocates are concerned that federal officials have gone too far in tamping down mortgage risk. But the next crisis isn’t likely to resemble the last one. Faced with increased regulation and scrutiny in one sector, financial institutions will simply turn to other kinds of financial products. A post-recession boom in subprime auto lending and junk-rated corporate debt, for instance, have recently raised concerns that few had anticipated four years ago. Such risky loans will continue unless regulations are implemented and enforced more effectively, said Admati. “We are not getting appropriate lending partly because the regulation continues to be flawed and distorts banks’ decisions,” she said.