What You Need To Know About Dodd-Frank

There’s a lot to dislike in the 2010 Dodd-Frank Act, which created new agencies, more bureaucracy and a tangle of rules for financial services and business in general. In the fight against over-regulation, the act has become a high-profile target, and the White House has frequently called for it to be overturned.

As is so often the case, however, things are not that simple. The act is very broad, and it clearly puts a burden on business. But it has its positive points, and it was created to address the very real problems that led to the 2007 financial crisis. Thus, many business people—including many bankers—are calling for fixing it, rather than gutting it or repealing it. “Radical change is not the answer,” James Gorman, chairman and CEO of Morgan Stanley, recently wrote. “Here is an opportunity for some common sense, targeted changes that can preserve the strength of the banking system while enabling the sector to better support the saving, investing and lending that promote economic growth and job creation.”

With that in mind, here are several points that CEOs can bear in mind when discussing Dodd-Frank.

Everyone agrees: Dodd-Frank is very complex. In its 2,300 pages, the act covers a lot of ground, from the way banks invest to requirements that companies report the use of “conflict minerals,” or minerals extracted in a conflict zone. About 30 percent of the 390 rules mandated in the act have not even been finalized. Nevertheless, notes the American Banking Association, it “has resulted in over 3,900 pages of proposed and final rules, which laid end to end would be nearly three times the height of the Empire State Building.”

“We can never be confident there won’t
be another financial crisis.”

Dodd-Frank has affected at least some lending. The act raised the bar for making loans, which logically would make it harder for businesses to get funds. However, commercial bank loans have actually risen from about $1.2 trillion in mid-2010 to close to $2.1 trillion today. On the other hand, it may well be that smaller businesses and startups, which present more risk, are having a harder time getting loans. And a University of Maryland study found that Dodd-Frank has had unintended consequences for middle-class home buyers. From 2010 to 2014, the study found, mortgage lenders reduced loans to middle-class households by 15 percent and increased them for wealthy households by 21 percent.

Compliance costs for banks have gone up—but how significantly? The American Action Forum says that in its first six years, the act cost businesses $36 billion—and a lot of that was borne by banks. However, observers point out that it can be difficult to separate out Dodd-Frank costs, especially with anti-money laundering rules and other regulations affecting banks. What is clear, however, is that the burden falls more heavily on smaller banks, which have far fewer resources to devote to compliance. And smaller banks, which really had nothing to do with the financial crisis, are a key resource for small businesses.

Some of it seems to be working. Bank-industry profits last year reached $171.3 billion, an all-time high. At the same time, all major banks passed the most recent Dodd-Frank-mandated stress tests that assess banks’ capital. The idea is that with more capital on hand, banks will be in better position to ride out a downturn, give government agencies time to respond and, ideally, avoid the need for bailouts. “This year’s results show that, even during a severe recession, our large banks would remain well capitalized,” Federal Reserve Governor Jerome Powell said in a release. “This would allow them to lend throughout the economic cycle and support households and businesses when times are tough.”

First, do no harm. Dodd-Frank created mechanisms to allow government agencies to
deal with systemic threats. Like many aspects of the act, such tools could be improved. But
as Federal Reserve Chief Janet Yellen recently told the Senate Banking Committee, “We can
never be confident there won’t be another financial crisis.” Looking back on the upheaval
caused by the recession—and the trillions of dollars lost—many observers suggest thinking
twice before the wholesale elimination of such safeguards. As Goldman Sachs’ Gorman
told CNBC a few months ago, “The last thing anybody wants to do…. [is] move back to the
deregulation that we had prior to the financial crisis. That did not end well.”