Skinned in the Game: Op-Ed on Risk-Retention Rules by Prof. Amar Bhide


Amar Bhidé is Thomas Schmidheiny Professor at The Fletcher School of Law and Diplomacy, Tufts University.

Banks, once burned, have pushed back successfully, so far, against a perverse Dodd-Frank rule requiring that they retain 5% of the risk of mortgages they originate. What's at stake for the industry, and for the feds.

The 848-page Dodd-Frank Act overflows with abstruse rules that have profound consequences, but attract little public attention. One such rule requires banks to keep at least 5% of the risk of the mortgages they originate, instead of passing it all off to buyers of securitized mortgages. Co-sponsor Rep. Barney Frank (D., Mass.) explained the theory: If banks have skin in the game, "we'll just get better-quality loans."

Regulators published a 97-page proposed rule in the Federal Register in April 2011 to implement the risk-retention requirements. Bankers lobbied against the proposal, arguing that it would retard the securitization of mortgages, deprive the housing industry of funds, and impede an economic recovery. Regulators retreated. A year has now gone by without a final rule.

Good riddance to the rule, but not because it would have hurt housing. Forcing banks to retain risks is unwarranted. Along with most other provisions of Dodd-Frank, it constitutes regulatory asphyxiation. Smothering the Federal Deposit Insurance Corp., the Securities and Exchange Commission, and the Federal Reserve with ambiguous new responsibilities for curing minor or imagined nuisances makes it impossible for regulators to focus on their crucial tasks. Worse, the rule would help perpetuate the excessive conversion of old-fashioned bank loans into tradable securities.

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