In a recent Streetwise Professor blog post, University of Houston Finance Professor Craig Pirrong asserted that Deutsche Bank's exit from U.S. swaps clearing due to capital cost concerns is symptomatic of how "major portions of Dodd-Frank and the regulations emanating from it need a thorough review and in some cases a major overhaul."

Professor Pirrong explained that Deutsche Bank "exited a business where the capital charge did not generate any commensurate return and, furthermore, was unrelated to the actual risk of the business" in its attempts to "economize on capital" (emphasis in original). "If the pricing of risk had been more sensible," Professor Pirrong conjectured, Deutsche Bank "might have scaled back other businesses where capital charges reflected risk more accurately." Professor Pirrong asserted that this example demonstrated that "the effect of the leverage ratio is all pain, no gain."

More generally, Professor Pirrong cautioned that "swaps clearing is now hyper-concentrated, and dominated by a handful of systemically important banks," which he argued could "create serious risks for [central counterparties] that they clear for." He stated that Deutsche Bank's exit is emblematic of larger concerns:

"[T]his one vignette demonstrates that Frankendodd and banking regulation generally is shot through with provisions intended to reduce systemic risk which do not have that effect, and indeed, likely have the perverse effect of creating some systemic risks. Viewing Dodd-Frank as a sacred cow and any proposed change to it as a threat to the financial system is utterly wrongheaded, and will lead to bad outcomes."

Commentary / Bob Zwirb

One could not get a sharper contrast between views regarding the value of the Dodd-Frank reforms than those expressed by CFTC Commissioner Bowen in her remarks at Northwestern University, and by Professor Pirrong in his analysis of Deutsche Bank's exit from swap clearing in the United States. Thus, Commissioner Bowen argues that "it would be short-sighted, even reckless, to repeal these crucial reforms and put the American economy, workers, investors, and everyone else at the risk of repeating the mistakes that brought us the financial crisis," while Professor Pirrong claims that "[v]iewing Dodd-Frank as a sacred cow and any proposed change to it as a threat to the financial system is utterly wrongheaded, and will lead to bad outcomes."

Similarly, where Commissioner Bowen urges the CFTC to go forward with new rules to address algorithmic trading, corporate governance, and position limits, and to strengthen ones already in place with respect to cybersecurity, Professor Pirrong complains that "not even" the clearing mandate is "on the table" for review by the Trump administration. And where Commissioner Bowen boasts that "our financial system is markedly safer than it was in 2008 thanks to . . . the passage and implementation of Dodd-Frank," Professor Pirrong asserts, by contrast, that Dodd-Frank "is shot through with provisions intended to reduce systemic risk which do not have that effect, and indeed, likely have the perverse effect of creating some systemic risks."

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