Congress has been scrambling to come up with a budget deal to avoid a government shutdown, and part of that compromise can and should be a bipartisan amendment that would reform the Dodd-Frank financial regulation package. To do so, congress will have to overcome the objections of an amendments biggest opponent, Senator Elizabeth Warren.
But Warren should, in fact, embrace an amendment to reform Dodd-Frank because it will only help protect the consumers she’s long championed. In particular, she’s made it clear that she wants to diminish the power of large banks and to strengthen small banks and consumers.
Dodd-Frank has diminished the power of the largest banks in a number of ways. While a full review of those ways is beyond the scope of this article, one example illustrates the point. The heightened supervisory power given by Dodd-Frank to the Federal Reserve Bank empowers the latter to exercise extraordinary control over “systemically important financial institutions” (SIFIs), including whether employees should be fired or disciplined.
This puts the Fed in a position indirectly but inexorably to engage in the capital allocation process, the lifeblood of the U.S. economy. That would move us from capital allocation based on economic considerations to one based on political considerations and diminish the power of large banks and other SIFIs.
Yet small banks have fared worse than the big banks under Dodd-Frank. They are falling by the wayside at twice the rate as before the bill was enacted. From October 2000 until July 2010, 298 banks failed. From then until late 2014, less than half as long a period, 242 banks failed. A major reason for small banks failing is that the regulatory burden of Dodd-Frank has been massive. More than 848 pages long itself, for the past five years no fewer than six government agencies have been writing regulations to carry out its statutory requirements.
Although there are already over 20,000 pages of new regulations, only 247 of the 390 required rulemakings have been finalized. Monitoring all the proposed and adopted rules requires significant numbers of lawyers. Some of the major law firms put together teams in July 2010, when Dodd-Frank was enacted, that are still at work keeping track of the proposals and the adoptions. While the large banks may be able to afford that, small banks cannot.
Of course other factors were at work, but the regulatory burden contributed significantly to the problem.
As small banks have failed, large banks have often moved into the vacuum. Thus Dodd-Frank has strengthened the largest banks not necessarily in absolute terms but relative to the small community banks.
While perhaps some under-served borrowers have been aided by Dodd-Frank, since its enactment many consumers have been hurt. This is an example of unintended consequences of Dodd-Frank. It included the “Durbin Amendment”, which limited the fees that banks could charge retailers when consumers paid with debit cards. To compensate for the lost revenue, many banks eliminated free checking or went to account maintenance charges, insufficient funds fees, or inactivity fees.
In short, under Dodd-Frank the number of underbanked low- and moderate-income individuals has been increasing. This matter has been much litigated between the banks and retailers. A three-judge panel of the D.C. Circuit Court of Appeals noted that “…given the Durbin Amendment was crafted in conference committee at the eleventh hour, its language is confusing and its structure convoluted.”
In short, Dodd-Frank has had secondary and tertiary effects that appear not to have been well thought out. Rather than ignore these effects, it would seem logical for Senator Warren to support rather than oppose amendments to Dodd-Frank to confine it to ways that really serve the American public.