The U.S. House of Representatives passed on May 22 a Senate-approved bill to ease federal restrictions on banks and reduce the cost of regulatory compliance. President Trump signed the legislation into law on May 24.
The Senate approved S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, in March. House consideration of the bill was initially delayed by disagreements between the two chambers.
Congress and President Barack Obama imposed strict restrictions on banks and other financial institutions in 2010 in response to the 2008 economic crisis, including enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd-Frank.
Jay Richards, an assistant research professor in Catholic University’s Busch School of Business and Economics and a policy advisor for The Heartland Institute, which publishes Budget & Tax News, says Dodd-Frank worsened the problems it was supposed to solve.
“The Dodd-Frank Act solidified some of the causes that led to the financial crisis,” Richards said. “Rather than dealing with the root cause of the crisis, Congress actually turned the privately held, too-big-to-fail attitude into official policy.
“One of the factors that led to the financial crisis was that very large banks, especially government-sponsored enterprises like Fannie Mae and Freddie Mac, felt an implicit protection from the government,” Richards said. “After Dodd-Frank, we name institutions as systemically important. That is like a stamp by the U.S. government that says ‘too big to fail.’ It increases the incentives for banks to get larger and more protected.”
Exploding Compliance Costs
James Barth, a finance scholar at Auburn University, says Dodd-Frank has increased businesses’ operating costs without providing benefits to the public.
“Dodd-Frank increased the regulatory compliance costs for banks of all sizes,” said Barth. “For example, the CEO of Zions Bank testified before a congressional committee and told them he had to hire about 27 new employees to deal with the new regulations. The new employees were basically compliance people. Those people contribute to costs, but they don’t contribute to revenue, because they do not do anything with respect to serving customers. They are in the back offices trying to figure out how to comply with regulations.”
Hitting the Customers
Barth says customers, not the banks, pay the costs of Dodd-Frank.
“Banks of all sizes had to hire more compliance people,” Barth said. “This is an additional cost imposed on the banks. Of course, banks are in business to make a profit, so they pass the costs on to the customers, through higher interest rates on loans, lower interest rates on deposits, or additional fees imposed on customers.
“By and large, customers were adversely affected by all of the new regulations banks had to comply with,” Barth said.
Richards says the Dodd-Frank compliance costs are forcing small financial institutions out of business, effectively promoting the interests of the biggest banks.
“Since the bill passed, a lot of smaller community banks have gone belly-up or sold out to larger banks,” Richards said. “It’s created an atmosphere where it is very uncompetitive to be a small community bank and very competitive to be a larger, more protected bank. Many of the silly practices that happened before the financial crisis, such as people getting loans with very little down [payment], are still happening.”
Editor’s Note: This article was published in cooperation with The Heartland Institute’s Budget & Tax News.
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