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Dodd-Frankly speaking, this act is wearing thin

In making Dodd-Frank’s provisions applicable to banks of all sizes, federal regulators trapped community bank dolphins in a Wall Street tuna net.

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From the pages of In Business magazine.

The five-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act has come and gone, but not without an avalanche of criticism. The law that was enacted to head off another financial crisis by reducing systemic financial risk and put an end to “too-big-to-fail” institutions on Wall Street is becoming a thorn in the side of community banks and credit unions.

While there is disagreement among bank executives about the severity of the impacts, particularly among banks of different sizes, community bankers and credit union executives say the law’s subsequent rule making and regulatory interpretations are doing real economic harm to banks, small businesses, and consumers. What’s more, the laborious rule-making process is nowhere near complete, so in their view, more harm is likely to come.

Jim Tubbs, president and CEO of State Bank of Cross Plains, acknowledges the noble intent behind the law, but notes that almost 400 new regulations will come out of the law, and his research indicates that federal bureaucrats are not even halfway through the rule-writing process. “So that, in itself, is already pretty daunting to know — that with everything that has transpired in the first five years of the Act, we’re still a long ways away from really swallowing everything as an industry,” he states.

The 2,300-page law, named for chief sponsors who are no longer in Congress — former U.S. Senator Christopher Dodd of Connecticut and former U.S. Rep. Barney Frank of Massachusetts — is considered the most sweeping rewrite of the nation’s financial laws since the Great Depression-era banking reforms. However, critics contend that none of the law’s promises have come to pass, noting that too-big-to-fail institutions are still with us, big banks are even bigger, smaller banks are fewer in number and pondering mergers with larger institutions, and bank fees have increased while the number of financial products available to consumers have decreased.

Some critics pin the nation’s stubbornly modest economic recovery on Dodd-Frank because even as the Federal Reserve’s quantitative easing has built up bank reserves, overall lending hasn’t increased that much. In Wisconsin, however, the overall picture is brighter, as the state’s 185 chartered banks reported an 8.7% increase in net income and a 6.3% increase in total lending during in the first half of 2015 compared to the same period of 2014, according to data released by the Federal Deposit Insurance Corp. The first half includes a lower past-due loan ratio of 1.71%, and a 6% rise in commercial and industrial lending, which topped $5.5 billion, according to the Wisconsin Department of Financial Institutions.

Even with those encouraging numbers, one of Dodd-Frank’s most vocal critics is Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association. She states that banks of all sizes continue to struggle with what she called the law’s overwhelming regulatory burden, which affects small community banks to a disproportionate degree. “The regulatory burden is almost like a snowball that keeps growing into an avalanche because it’s just not over yet,” she states.

Sense of community

Community banks, which make the bulk of small business loans, are reportedly overwhelmed not so much by Dodd-Frank, but by the complexity of the rules handed down by federal bureaucrats. They are hiring more compliance officers to deal with the complexity of emerging Dodd-Frank regulations, but they aren’t hiring as many people to process business, consumer, and other types of loans. To build the necessary scale, they are also giving strong consideration to merging with larger banks.

John Patti, a mortgage loan officer with State Bank of Cross Plains, works with a young couple on their mortgage loan. Other community banks are thinking about getting out of the mortgage lending business because of the cost impacts of the Dodd-Frank Act. (Photo: Adam Crowson)

For many, lumping community banks in with the Wall Street “perps” that helped cause the housing and financial collapse was akin to catching dolphins in a tuna net. “With regard to the concept of the Act, it was done in good faith,” Tubbs states. “We certainly had a financial collapse, and the Act was to prevent another collapse from happening. Hence, more transparency within the so-called Wall Street banks, as well as a complexity of being able to monitor the too-big-to-fail banks — once again, on Wall Street.

“Last but not least, as the long title states, we needed more protection for consumers. So without question, the concept behind the Act was established in good faith, but unfortunately the consequences have been quite a burden on community banks.”

That burden, he adds, involves researching, interpreting, understanding, and then enacting the regulations that have been passed down. In the past, these regulations would have been just four or five pages long, but now they could be as long as 100 pages for one rule. As a result, the bank’s compliance expenses, including personnel and software upgrades with new forms, applications, and disclosures that are aligned with new rules, have increased 40%.

“So we will have to research and interpret, and then make sure that our systems, policies, and procedures are in compliance with that regulation,” Tubbs says. “To say the least, the increase in cost has skyrocketed for community banks to be able to monitor and measure how we’re doing in relation to all these regulations that are being passed down to us.”

Since banks have to maintain profitability to provide a good return to the shareholders who have invested in them, banks pass those costs to their customers to the extent that they legally can. In that environment, Tubbs notes that there are fewer free services unless certain conditions are met — free checking through a rewards program or another incentive — and consumers see different kinds of service charges. So while banks invest in compliance and in conveniences like mobile banking services, “the industry has to find new ways to pass on these expenses, these costs to the consumers in order to maintain an appropriate level of profitability for return to our shareholders,” Tubbs asserts.

One area where banks are likely to engender little public sympathy is with their complaints about the Durbin Amendment, named for U.S. Senator Richard Durbin, D-Illinois. That part of the Dodd-Frank law placed a cap on the fees banks can charge to retailers to process debit card transactions, which cuts into a bank’s revenue for common transactions. Tubbs cited one statistic that says the cap pulls $14 billion in revenue out of the financial industry, but however large the impact, it means finding other ways to increase revenue.

“If that isn’t being passed on to the consumer, and the bank’s profitability has now been impacted, you’re going to have shareholders who are more disgruntled with their return, and you’re not going to be able to fund your benefit program, whether it be 401(k)s or other things, as much as you hoped you could,” he explains. “So you could end up then with more turnover.”

Tubbs suggested that disgruntled shareholders and disappointed employees contribute to an environment for increased mergers and acquisition activity. He notes the overall number of banks has decreased in number from over 8,000 a few years ago to about 6,800 today. Some of this decline is due to bank failures stemming from poor operational decisions, but some is also attributable to costly regulation.


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