Our federal government’s response to the financial crisis that began in 2008 was to declare, “This will never happen again.” The Democrat-controlled Congress went about the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and President Barack Obama signed it into law on July 21, 2010. The Dodd-Frank Act, as it is commonly known, made changes to the entire American financial regulatory environment that affected every financial regulatory agency and every part of the nation’s financial services industry.
Now, nearly six years later, what has happened? Have consumers and small businesses been helped or hurt in the process? Let’s first take a look at the financial regulatory changes that have been mandated by Dodd-Frank:
- The Office of Thrift Supervision and the Federal Thrift Charter were eliminated;
- Regulation aimed at increasing transparency of derivatives was introduced;
- The Consumer Finance Protection Bureau was implemented; and
- The FDIC was given enhanced “resolution” authority.
Dodd-Frank has had unusually far-reaching effects on our nation’s financial system over the past six years, and many of these changes have had both anticipated and unanticipated impacts on consumers. As a result of the elimination of the Office of Thrift Supervision and the elimination of “thrift” or “savings and loan” charters, the regulatory landscape of our national banking system has been changed. “It’s a Wonderful Life” with Jimmy Stewart will never have a sequel, and in my opinion Main Street consumers of banking services are the loser. Of course, the demise of the savings and loan institution started years ago as a result of the “thrift crisis,” which extended from 1989 to 1995, but Dodd-Frank put the final nail in the coffin.
Savings and loans institutions long had been a place where average folks went to open savings accounts. Their deposits were in turn lent back out to other folks in the community who wanted to purchase a home. Quite often, the bank president knew not only the saver and the borrower, but also their parents and grandparents. As the financial world has evolved into a global market, the place for small community savings and loans has vanished in favor of standardization and lower interest rates. Let me grade the demise of the savings and loan under Dodd-Frank as an “F,” because community banking has a significant role to play in small and midsize communities like Hilton Head Island and Bluffton. Unfortunately, in an effort to deal with regulator issues of “too big to fail,” savings and loans, community banks and consumers were losers.
On goal No. 2, I think it is safe to say that the letter grade on improving the transparency of derivatives needs to be an “Incomplete.” In my opinion, and I have said this in prior articles, the financial crisis or Great Recession was the child of greed on Wall Street. I, for one, don’t think it possible to regulate “greed” out of the human experience, let alone out of financial markets. Trying to regulate greed is a fool’s game, and the regulations have yet to be tested. What we know is the cost of lawyers and accountants has risen, and financial instruments like residential mortgage-backed securities and collateralized debt obligations have only returned to the market in a limited fashion. Eventually, if the American housing market is to return to a more “normal” state, we will need to test these new disclosure rules and restate the global markets for asset-backed securities.
The third significant area mandated by Dodd-Frank is the creation of the Consumer Finance Protection Bureau. Founded in 2011 with a budget of $447.7 million and 947 employees, this independent agency is solely responsible for consumer protection in the financial sector. The bureau has jurisdiction over banks, credit unions, security firms, payday lenders, mortgage bankers and servicers, as well as debt collectors.
The bureau has issued rules governing credit card fees, mortgages and other financial products. As a result of these rules and the reaction of credit providers, it is understood that consumers are no longer subject to what might have been considered abusive practices on the part of lenders. That is a good thing, but the downside is that consumers now actually have more limited access to credit — and that is a bad thing. So at this point, the best I can do is give item No. 3 a “C.”
The fourth mandate was to enhance the ability of the FDIC to “resolve” issues arising out of a “big bank’s” failure. In other words, address the “too big to fail” issue and protect the American taxpayer against another need to implement a Troubled Asset Relief Program, or TARP. Again, we need to grade this as “Incomplete,” because we will only know for sure ifthe steps taken can avoid another TARP. We now have “systemically important financial institutions,” or SIFIs, we have “stress tests” and field liquidation plans, but we haven’t had a recession yet. Let’s all hold our breath and hope that we aren’t tested — and do you know that TARP and the Fannie Mae/Freddie Mac bailouts have produced a profit for the United States Treasury?
The answer is a resounding yes: We are all being impacted by the trailing debris left by the creation of Dodd-Frank. We have new federal bureaucracies, we have more regulators, and we all have less access to credit. Maybe we need to try again?
Elihu Spencer is a local economist with a long business history in global finance. His life work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.