Dodd-Frank, the regulatory behemoth signed into law in 2010, is undoubtedly a big burden that banks must bear. Clocking in at 2,300 pages and counting, the legislation can be overwhelming. Many in the industry believe its regulations will hurt community banks and force consolidation that will limit the number of small banks in this country.
Philip Ellis, senior counsel at Manufacturers Bank, a $2.1-billion asset institution headquartered in Los Angeles, California, thinks the law is not only harmful to community banks, but to the customers they serve.
He cites new rules on consumer foreign wire transfers as an example, saying that the rules will force out smaller banks, resulting in only larger banks and non-bank players like Western Union wanting to offer these services to consumers.
“It’s going to limit their choices,” says Ellis.
However, is there anything good to be said about Dodd-Frank’s impact on the banking industry? When all the dust from the 2,300 pages has settled in a big heap of regulations, what will be good about Dodd-Frank for banking?
“In the short term, these changes can test staff and operations,” says Simon Fish, executive vice president and general counsel of BMO Financial Group, a $525-billion asset financial services company based in Toronto, Canada, and operating in the United States through BMO Harris Bank.
New Consumer Focus
But Dodd-Frank’s supervisory focus on the consumer is beneficial, and will help the banking industry win back consumer trust, says Fish.
Tom Feltner, director of financial services at the Consumer Federation of America, an association of non-profit consumer organizations supportive of Dodd-Frank and the Consumer Financial Protection Bureau, echoes this thought.
“The industry stands to gain a lot of clarity,” says Feltner, adding that Dodd-Frank “stands to strengthen the industry by making sure that consumers are aware of their credit options, [and] that those credit options are safe and sustainable.” Creating a marketplace where consumer options are more transparent, and uncertainty, caused by abusive products, is removed, will further strengthen the financial sector, he says.
Level Playing Field
Dodd-Frank, through the Consumer Financial Protection Bureau, “creates a level playing field in terms of supervision and regulation of the industry,” says Feltner, as nonbank competitors such as pay day lenders have to follow many of the same rules as banks, posing “real benefits for the financial services sector.”
Joel Brickman, general counsel at The Cape Cod Five Cents Savings Bank, a $2.3-billion asset bank based in Cape Cod, Massachusetts points out that Dodd-Frank regulates community banks differently than the big banks.
“Dodd-Frank recognized that community banks are a different segment of the industry,” says Brickman, “and do not warrant all the same regulations as the large banks.” For example, banks and thrifts with less than $10 billion in assets don’t have to comply with the Durbin amendment, which limits fees on debit cards.
Increased Safety and Soundness
Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs with the American Bankers Association, sees additional benefits when it comes to the safety and soundness of the financial system. He supports the creation of the Financial Stability Oversight Council (FSOC), established by Dodd-Frank and chaired by the secretary of the U.S. Treasury.
“One of the duties given to the FSOC was that they keep an eye on the systemic consequences of the accounting rules put forward by FASB (Financial Accounting Standards Board),” says Abernathy. “We believe that some of the accounting rules accelerated the crisis.”
In the past, he says, problems occurred as rules developed that did not look at the big picture. FSOC evaluates accounting rules to determine if they have systemic consequences. Additionally, FSOC enhances coordination among regulators.
Do these positives outweigh the negatives? Abernathy doesn’t think so, largely as the legislation takes discretion from bankers, and redirects it to Washington bureaucrats.
“When you do that, then the bank’s number one concern is not meeting the needs of customers,” he says. “It’s meeting the needs of regulators.”