This week marks five years since President Obama signed Dodd-Frank into law. At 2,300 pages and 400 new rules – many of them not even implemented yet – the legislation is one of the most widespread restructurings of our nation’s finance and banking sector in history.
After the 2008 financial crisis, Americans were left with a lot of questions: What does this mean for my retirement? What caused markets to take a turn for the worse? Can we expect any financial stability in the future?
Much of the criticism centered on the concept of banks being “too big to fail”. In other words, a handful of the largest banks in our country had become so systemically important that our nation’s entire economic health hinged on the success or failure of these institutions.
Congress hastily moved to find ways to prevent this from ever happening again. The result was Dodd-Frank. This far-reaching piece of legislation was enacted in an attempt to prevent another financial crisis.
Early on it became clear that the big operators on the east and west coasts – those considered “too big to fail” – were not the ones facing the greatest pressure under the new law. Just as I feared when I voted against Dodd- Frank, it was the small banks that took the hardest hit.
They were quickly overwhelmed. Many have been squeezed out of the marketplace and the barriers to entry have gotten even steeper.
One survey from Harvard University found that the rate of decline in community banks’ market share has doubled since Dodd-Frank was enacted. The authors of the study attributed this downswing to an “increasingly complex and uncoordinated regulatory system.”
For those who live in rural America, these smaller institutions are the lifeblood of the community. In nearly one out of every five counties in our country, community banks are the only physical institution according to the FDIC. It’s the bank where you know the teller and the loan officer, where you have your savings account and where you have your mortgage.
Unfortunately, Dodd-Frank hasn’t done rural America any favors. Community banks are experiencing a downward trend and many small town bankers simply don’t have the time or staff to keep up.
One community banker told me the biggest challenge, five years after Dodd-Frank, is just the sheer volume of regulations issued in the law’s 2,300 pages. For every page, she says, you have implementing regulations. Some of which strip away their discretion to the point where long-term customers with a history of reliable payments must be turned away.
Many smaller banks simply can’t keep up. Unlike larger financial institutions, these banks can’t afford to hire staff to work on compliance full-time. They end up spending thousands of dollars sending staff to compliance classes just so they can continue to follow the deluge of new rules and regulations.
These costs inevitably hit the consumer. For many community banks, Dodd-Frank has driven them out of the mortgage lending business altogether. Your local financial institution, which knows the customers, knows the properties, and knows the values, won’t be able to write mortgages anymore.
The bottom line is our country’s community financial institutions need relief. They were never the intended target of Dodd-Frank and members on both sides of the aisle realize this. Rather than drive these institutions out of business, Congress should act to bring some commonsense to a law that has left us with more paperwork but fewer solutions to the problems that got us here.