Aegis Compliance and Ethics Center, LLP
Dodd Frank: How Changes Would Affect Bank Regulations
In the wake of one of the biggest financial crises to ever hit the United States economy, the Dodd-Frank Act emerged. Nearly a decade later the act is still in place, but some, like President Trump, are looking to significantly alter the law. Initially, the 848-page piece of legislation sought to revamp American banking regulations in light of the 2007-2008 housing crisis. Current lawmakers, armed with hindsight, argue the law has overreached and hindered small banks. Although Dodd-Frank is not perfect, lawmakers should continue to amend the law in lieu of total deregulation.
What does Dodd-Frank do?
The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank for short, was passed in 2010. The Act’s namesakes, Senator Chris Dodd and Representative Barney Frank, hoped to provide the banking industry with needed reform. One of the main components of the extensive bill requires banks with $50 billion or more in assets be subjected to “stress tests,” which simulate financial disasters. In order to pass a stress test the banks must show they can appropriately absorb and respond to the simulated crisis. In layman’s terms, the stress tests could be likened to intricate annual fire drills for banks. This measure was put in place to properly identify banks that were “Too big to fail.” The housing crisis demonstrated that a “systematically important” bank failing was not an option (hence the ultimate government bailouts).
The requirements imposed on banks under Dodd-Frank are proactive in nature. Stress tests are limited in scope but help assure that banks are not overly susceptible to potential financial crises. Representative Barney Frank himself admits that Dodd-Frank is not foolproof stating, “Anytime you pass a very complicated piece of legislation, you don’t get everything 100 percent right the first time.” Small banks saw their numbers dwindle by a reported 14% during the 4-year period following the implementation of Dodd Frank. De-regulation proponents often refer to this as justification in moving forward with financial reform.
The Alternative Approach
Dodd-Frank is as divisive as it is pages long. Since its inception, the law has had firm detractors who often cite the impact on small banks and the burden ultimately placed on consumers. Specifically, Representative Jeb Hensarling and his Financial Choice Act look to completely revamp what Dodd-Frank has in place. Widely backed by economic conservatives, the Choice Act passed in the House of Representatives this past June. A direct change found in the Choice Act would be to relieve the restraints and requirements for banks that don’t fit the “Too big to fail” category. Commonly referred to as “community banks,” these smaller institutions would in theory be able to serve their regions better by having an influx of small businesses loans and mortgages. Although the Choice Act tackled issues like community banks, other sections of the 600 page bill continue to lack a consumer friendly approach.
The Choice Act, though passed in the House back in June, has yet to pass the Senate. However, some components are already taking effect while other components seem to clash with consumer best interest. Retirement advisors currently are not required to advise their clientele based on their best interest. The measure making it law was blocked from going into effect June 9th of 2017. Additionally, the Choice Act would exempt historically predatory businesses, such as payday or car title loans, from regulation. This is a concerning proposition seeing as these type of businesses already cater to a lower socio-economic demographic. Unpopular measures like these coupled with the political climate in Washington will likely see the Choice Act continue to flounder in the Senate. Nevertheless, it does possess aspects that could ultimately become part of a bipartisan approach to financial reform.
A Likely Middle Ground
The prospect of a complete overhaul of Dodd-Frank as is intended by the Choice Act is minute. Yet, “tweaks” to the already existing framework may have the best luck of gaining bipartisan support. Particularly, relief for community banks has widely been received positively by both Republicans and Democrats. NPR reported in June, referencing Representative Frank, “Frank says his namesake financial reform law has been too restrictive on smaller banks. He also believes the threshold used to identify other banks ‘as too big to fail’ should be higher.“ Ultimately, the end goal of any financial reform must build on and do away with imperfections currently set in Dodd-Frank. The spirit of the Choice Act manifests itself in a de-regulation movement that opens the door to the possibility of consumers footing the bill when things derail. Bipartisan tweaks are the best way to ensure this does not happen again.