The first presidential debate went over a lot of topics – taxes, Medicare, budgets – that were very much worth spending a lot of time on. But one of the things that came up far more than I ever thought possible was the Dodd-Frank Act, aka the Wall Street Reform and Consumer Protection Act of 2010. Mitt Romney called it “the biggest kiss to New York banks I’ve ever seen.” He went on at some length about it, too, claiming “We need to get rid of that provision because it’s killing regional and small banks.”
Some of you know far more about this than I do, but this absolutely shocked me. Dodd-Frank is really a non-issue, a half-step where a bold march forward is called for. About half the world thinks it went too far and half thinks it didn’t go far enough, meaning it’s a rough compromise. And, in practice, it doesn’t seem to have really changed very much.
How did this come up as an issue? Dunno. But I’m asking all of you to correct me if I have this wrong.
Dodd-Frank was passed in 2010 when the Democrats controlled both houses. It’s named for Sen Christopher Dodd (CT) and Rep Barney Frank (MA) who sponsored the bill. There are many sections to full of a laundry list of smaller provisions that provided more of a roadmap to regulation than any kind of complete overhaul.
It created the Financial Stability Oversight Council, which as its name suggests oversees (overlooks?) the general health of the financial industry as a whole. New powers were given to the FDIC and Comptroller’s office to force big banks to conduct “stress tests” and required to have orderly liquidation plans. It created a fund that will bail out “too big to fail” banks according to their plans, and regulates that they can’t have more than 3% of their investments in hedge funds. Lastly, it overhauls the mortgage industry, imposes some tougher standards, and affords some consumer protection.
There’s a lot more to it than this, but you get the picture. If I missed something important please let me know. Yes, it touches nearly every aspect of banking in some way or the other – but it didn’t really change anything substantially.
The current rail against Dodd-Frank has to do with the way “too big to fail” was essentially codified into law, giving big banks an edge on lower interest rates (since they have lower risk) versus small banks. The problem with this argument is that nothing really changed – the TARP of 2008 informed the market what would be done to save big institutions, “moral hazard” be damned. Writing this into law was more about the responsibilities and new regulations that come into play for those banks than anything.
Which brings us to the claim that small banks are suffering. It’s simply not true, as smaller banks are generally enjoying profits above and beyond what they saw in the 1990s and 2000s. They seem to be where the action is these days, lending money to smaller entrepreneurs and businesses that have been turned down by larger banks. They are probably the source of a lot of economic growth, especially in jobs, that has been hard to track.
So what’s the beef with Dodd-Frank? To be honest, I have no idea. If I ran a big bank like, say, JP Morgan, I might carp about the new regulation no end – which Jamie Dimon has done. But for small banks, there does not seem to be much change at all in terms of how they do business. Empirical evidence suggests they might be better off, but it would make more sense to chalk that up to the reality that small community banks are much closer to the action and much better at managing risk in today’s world. This excellent analysis by Stephen Gandel of Fortune says it all.
The most reasonable thing that can be said about Dodd-Frank is that it’s not much of an issue.
Now, there may be something I’ve missed here. Please, if there is, call me out on this. But I can’t believe it even came up in a presidential debate in the first place. The worst excesses of the mortgage industry have been called out, and everyone has to keep an eye on the worst case scenario in case it all fails one day. What is wrong with that? What, for that matter, has really changed in the way banks make money loaning it out and managing risk day by day?