Analysis & Opinion

Reflections on Five Years of Dodd-Frank

Is a diminished banking industry signalling a need for change?

OVERLAND PARK, KS–(Marketwired – August 05, 2015) – The most hotly-contested piece of financial industry legislation hit the half decade mark on July 21.

The Dodd-Frank Act — first proposed by and named after former Senator Chris Dodd and Representative Barney Frank — has seen its fair share of negative reviews.

Critics assert that it's actually made things worse than the 2008 financial crisis it was aimed at fixing. The London School of Economics' Systemic Risk Centre suggests the Act will destabilize global financial markets even more because it forces all banks to take the same approach to risk.

The study even goes as far as comparing the practice to a weakened immune system. Critics also believe it's had a negative effect on consumers and smaller community banks. The country is losing one community bank or credit union a day on average. Banks fees to consumers have risen considerably and now only 39 percent of banks offer free checking in comparison with 75 percent just two years before the Act's passing.

One report from the Competitive Enterprise Institute even found that the same too-big-to-fail banks are now even more entrenched because of the tightened restrictions on opening new banks. Before Dodd-Frank was enacted, new banks were cropping up at a rate of 170 per year. In the five years since, only one new bank has been approved by regulators, stunting competition in banking and limiting consumer access to loans and lines of credit.

In it for the long run?

It's not surprising that some uncertainty about Dodd-Frank's future lingers. Some measures of the bill have yet to be written. Constant legal challenges surround any positive progress toward actual policy creation. Despite these objections the creators of the eponymous Act don't seem too worried.

"I didn't write the perfect law," says Chris Dodd in an interview with the Wall Street Journal. "People are talking about changes to Dodd-Frank and I understand that, but no one really wants to recommend we go back to September 2008."

Dodd goes on to say that the people most opposed to the bill in the first place 'couldn't organize a two car funeral,' the idea being that no one person or party knows how to solve the situation once and for all. Instead, the Act's authors point to the positive impact it has had on the average American family. In the same Wall Street Journal interview, Rep. Frank postulates that "substantially diminishing the number of loans that are made for residential mortgages that should not have been made was the single biggest thing we did."

I didn't write the perfect law," says Chris Dodd in an interview with the Wall Street Journal. "People are talking about changes to Dodd-Frank and I understand that, but no one really wants to recommend we go back to September 2008

That high number of loans resulting in defaults was the straw that broke the Lehman Brothers investment firm's back and initiated the chain reaction of banking and investment dominoes. In addition to overselling subprime loans, Lehman Brothers also did their own lenient stress tests, excluded some of their most volatile assets among said tests and had no emergency plans to sell off those assets in case of a disaster. All of which are now areas that Dodd-Frank has established quarterly reviewing and reporting to deal with.

All join in

In terms of what the future will hold for financial regulation, many figures from both sides of the aisle have ideas on how to correct the system. Elizabeth Warren and Democratic presidential hopefuls Bernie Sanders and Martin O'Malley support reinstating the Glass-Steagall Act — requiring big banks to divide commercial and investment banking — but the White House has been distancing itself from that idea as of late.

The Republican camp, on the other hand wants to see a delay or complete shutdown of the Volcker Rule, which would prevent banks from using consumers' money for commercial investments by separating the investment arms from retail banks. Others in the GOP are calling for reforms of Title VII of Dodd-Frank specifically — referring to the regulation of over-the-counter derivative trading — saying that regulation should be based on the size of a firm's capital instead, not unilaterally.

However the financial sector cures its woes, assuming it ever does, it seems that the tumultuous stage in Dodd-Frank's life is far from over. Financial institutions, compliance experts and politicians all have a vested interest in how the situation pans out, so it's easy to see that this will not be an easy fight over this regulatory kindergartner.





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