Dissecting Dodd-Frank Five Years Later
Is Dodd-Frank hurting small community financial institutions?
It's a question that has been asked repeatedly, and as the five-year anniversary of the legislation nears, it is not a question that will be asked in earnest again. Those involved in the discussion already have the answer.
The answer, however, will change depending on whom you ask.
The House Financial Services Committee began a series of committee hearings July 9 to dissect the effect of the law and whether it had overregulated banking institutions and, as an unintended consequence, crippled smaller institutions.
Whether or not the law will ever be repealed or replaced would likely depend on the 2016 election cycle. At least one Republican nominee hopeful, former Texas Governor Rick Perry, had publicly stated support for implementing banking regulations, but said he felt the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 made it difficult for small banks to stay in business while big banks continued to thrive and found ways around the current regulations.
In February, the CATO Institute released a brief, which read that while small financial institutions were not the target of Dodd-Frank and that small banking institutions were given a pass around some of the more stiff amendments, the law had deeply affected small banks.
The brief used a 2013 survey of approximately 200 small banks and summarized that the cost of the regulations had hurt community financial institutions. The finding concluded that small banks will see a shrink in the residential mortgage business in the future and will not be able to easily offer products such as overdraft protection.
That sentiment was shared by several Republicans in Congress, including Committee Chairman Jeb Hensarling (R-Texas). However, a poll conducted for Americans for Financial Reform and the Center for Responsible Learning showed that the majority of Americans support financial regulations by the federal government. Commissioners of the poll told the media July 7 that despite strong distrust of government, 70% of Americans agree that regulating financial institutions is very important.
The poll also showed that more than half of Americans want more regulation and that a right or wrong vote from elected officials when it comes to diminishing financial regulations would determine their outcome at the polls during reelection, despite the fact that generally 80% to 90% of incumbents are reelected depending on which chamber they sit in.
NAFCU Vice President of Legislative Affairs Brad Thaler said when Americans take those polls, they are usually thinking of the big banks that are accused of being responsible for the economic downturn of 2008 and don't blame credit unions for the fall. However, he said, it is credit unions that are taking the fall now.
According to NAFCU, more than 1,250 credit unions have disappeared since the passage of Dodd-Frank. Of that 1,250, more than 90% of credit unions have less than $100 million in assets.
“That's over 17% of federally insured credit unions,” Thaler said. “Quite often, the number one reason they give for that disappearance, oftentimes merging out of business, [is] they can't keep up with the regulatory burden. They just can't survive on their own.”
Thaler blamed the tidal wave of regulations that were meant to reign in big banks but affected the community institutions that only employed one compliance officer. He said it became too overwhelming to keep up.
“Credit unions have to comply with the same rules as big banks,” he said.
Thaler said NAFCU has and will continue to advocate for reforms to get rid of a one-size-fits-all approach. He said one reform he would like to see Congress implement is a rule that requires a mandatory analysis of the benefit versus cost of compliance after a law is put in place. He said even if the laws are well-intentioned, the compliance and cost burden is often severely under exaggerated prior to the law being enacted.
“It should be a requirement for them to go back and look at whether compliance cost was accurate,” he said. “We understand the burdens the credit unions are facing in this environment. Our fears have proven to be true.”