Dodd-Frank: Understanding why it matters and why it should go

Dodd Frank was supposed to fix the problems of banks 'too big to fail.' Instead, big banks are bigger and community banks are on the ropes. And small banks have been harmed.

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President Obama said, standing alongside his economic team. "Our economy will once again thrive, and America will once again lead the world in this new century as it did in the last." - White House photo 2/25/09 by Pete Souza

WASHINGTON, February 16, 2017 – The Dodd-Frank Act was passed in 2010 in response to the 2008 financial meltdown. This financial reform act was designed:

“To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

President Trump has called for the repeal of Dodd-Frank, officially called the Wall Street Reform and Consumer Protection Act. He claims that because of Dodd-Frank, “banks aren’t lending money to people who need it.”

President Trump is correct.

Dodd-Frank should either be scaled back or repealed and replaced. It does not tackle the problems that created the 2008 crisis, and it is damaging community banks in favor of the “too big to fail” banking behemoths it was supposed to rein in.



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Dodd-Frank has made it more difficult for banks to make loans. This has hit small businesses and customers with marginal credit the hardest. According to a University of Maryland study, because of Dodd-Frank, “lenders reduced credit to middle-class households by 15%, and increased credit to wealthy households by 21%.”

Dodd-Frank has not ended “too big to fail.” The concentration of banking assets has increased since it was passed, with the five largest banks now controlling 44 percent of U.S. banking assets.

Worse, the number of small, community banks has declined by 25 percent since 2008. People in the industry claim that this is due in large part to the heavy administrative burden created by increased oversight. Almost 500 small banks have failed in the last eight years, and about 1200 other banks have merged in attempts to hold down costs. The effect has been to increase the average size of banks and give a competitive advantage to the largest, already “too big to fail” banks.

The effect has been to increase the average size of banks and give a competitive advantage to the largest, already “too big to fail” banks.

This has happened in spite of an economic recovery that started even before Dodd-Frank was signed into law. Dodd–Frank has generated a storm of supporting regulation, which works directly to undermine the “too big to fail” mandate written into the law.

Regulation tends to increase monopoly power by raising barriers to entry and favoring larger firms—with larger staffs and greater ability to bear regulatory costs—over smaller firms. Bloomberg’s Noah Smith observes that a monopoly is a growing problem across the U.S. economy. Creeping monopoly saps business dynamism, reduces economic equality, hurts workers, and can slow productivity growth.

This is almost exactly what has happened in the U.S. financial sector. According to the Independent Community Bankers of America, no one element of the regulation has been the crucial hit on community banks, but they suffer under a constant barrage of small blows and tiny cuts that have left management and staffs exhausted. One of Dodd-Frank’s still unrealized blows is the requirement that banks collect and report information about every small business loan application. This not only adds to the already heavy burden on small

One of Dodd-Frank’s still unrealized blows is the requirement that banks collect and report information about every small business loan application. This not only adds to the already heavy burden on small banks but adds to the difficulty small businesses face in raising capital.

Dodd-Frank has hit small banks by inhibiting innovation. It limits the types of products they can offer and has pushed financial innovation to companies outside the regulatory umbrella and outside the U.S.

Financial regulations after 2008 were designed to prevent another failure like the Lehman Brothers collapse. But community banks weren’t part of the problem then. They typically have assets in the billions of dollars, which to consumers seems huge, but regional banks typically have assets a hundred times larger, and international banks like Wells Fargo have assets of trillions of dollars. Regulations designed to prevent pre-2008 problems from reappearing in those banks are onerous and unnecessary when applied to community banks.

Regulations designed to prevent pre-2008 problems from reappearing in those banks are onerous and unnecessary when applied to community banks.

Under Dodd-Frank, government agencies have created 24,000 pages of new regulation. Yet of the 400 regulations required by the Act, only 70 percent have actually been finalized; thousands of pages more of regulatory weight are waiting to be dropped on America’s community banks.


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These rules and regulations are wide-ranging. The Commodity Futures Trading Commission (CFTC) has so far issued 69 rules and orders to regulate the marketplace for swaps in response to Dodd-Frank. The CFTC is specifically authorized to regulate swap dealers, increase transparency and improve pricing in the derivatives marketplace, and reduce risk to the American public in the marketplace.

In addition to expanding the regulatory role of existing agencies, Dodd-Frank created new ones. The Consumer Financial Protection Bureau (CFPB) is the agency that fined Wells Fargo for opening new customer accounts without customers’ approval. While that action met with a mostly favorable response, the CFPB also created a new regulation on mortgage lending that runs over 1,000 pages. The CFPB is funded by the Fed, freeing it from congressional control of its funding, a constitutional check on all executive expenditures.

Dodd-Frank created the Financial Stability Oversight Council (FSOC) under the Treasury Department to increase monitoring of the U.S. financial sector. The FSOC extends regulatory oversight to “systemically important financial institutions,” subjecting them to capital requirements that increase consumer costs without affecting any operations that contributed to the financial collapse.

Then there is the “Volcker rule.” The rule prevents proprietary trading by banks—that is, trading securities on their own account—despite a complete absence of evidence that this type of trading had any role in the 2008 meltdown. The idea was to prevent banks from making speculative investments that don’t benefit their customers.

According to a working paper at the Federal Reserve, the rule has been effective mainly at reducing the liquidity of the corporate bond market.

Dodd-Frank should be a high priority for repeal and replacement. President Trump has already signed legislation to repeal a securities disclosure rule aimed at energy and mining companies. The bill was passed in the Senate 52-47 through use of the Congressional Review Act, which authorizes Congress to review and cancel regulations introduced by federal agencies in the last six months.

Repeal of Dodd-Frank itself will be more difficult. The realities of the Senate now require that there be 60 votes lined up for repeal, which means that Republicans must find at least eight Democrats to join them in that task. Unless Republicans can propose a solid alternative—and there are alternatives on the table—they won’t get those votes.

Repeal is worth some compromise.

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Jim Picht
James Picht is the Senior Editor for Communities Politics. He teaches economics and Russian at the Louisiana Scholars' College in Natchitoches, La. After earning his doctorate in economics, he spent several years doing economic development work in Moscow and the new independent states of the former Soviet Union for the U.S. government, the Asian Development Bank, and as a private contractor. He has also worked in Latin America, the former USSR and the Balkans as an educator, teaching courses in economics and law at universities in Ukraine and at finance ministries throughout the region. He has been writing at the Communities since 2009.