Regulatory Roulette and the Saga of Dodd-Frank
By Kuper Jones
The financial crisis that struck America years ago was the most devastating economic event to occur in recent U.S. history. Hardworking citizens across the country were severely damaged and many are still reeling in its aftermath. Legislators’ reaction to the crisis was predictably more heavy-handed, top-down government regulation – better known in Washington speak as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or more simply, Dodd-Frank. Four years after its passage, Dodd-Frank is a prime example of why implementing sweeping regulations in a top-down manner is ineffective and less beneficial than market based solutions.
The goal of Dodd-Frank was to effectively respond to the financial crisis, however, the legislation has completely missed its mark, and spread tentacles into sectors that had little or nothing to do with the banking crisis that triggered its passage. What’s worse, the long-term regulatory regime it created continues to impose costs on consumers and businesses. In fact, the Mercatus Center at George Mason University has done an extensive analysis on how many regulations Dodd-Frank has implemented as well as an estimate of what new regulations are to come. The analysis found that Dodd-Frank added 5,362 new restrictions or a 10.5 percent increase in already existing regulations. Further, Mercatus estimates that financial industry regulatory restrictions will increase by a whopping 32 percent once the rules are finalized.
Due to the way the legislation was crafted and financial regulators’ poor economic analysis of Dodd-Frank rule makings, it is impossible to estimate any costs or benefits new regulations may have. The attached graph shows how far-reaching the regulatory web of Dodd-Frank truly is.
Graphic courtesy of the Mercatus Center at George Mason University
This regulatory regime has had many adverse effects that harm both consumers and small businesses. A specific example of this is local banks. Dodd-Frank places a large financial burden on small banks with various compliance costs that they may be unable to afford. Furthermore, small banks are now at a significant disadvantage as they no longer benefit from the lower, more appropriate funding costs they enjoyed prior to Dodd-Frank.
Another adverse effect caused by Dodd-Frank is related to debit card “swipe” fees through a provision that has nothing to do with the financial crisis: the “Durbin amendment”. This amendment allows the Federal Reserve to cap fees banks can charge retailers for debit card transactions. Consumers have seen no benefit from this artificial fee reduction. Banks have added other service fees to make up for lost swipe fee revenue. As a result of the amendment, consumers have seen free checking accounts and debit rewards programs disappear. The Heritage Foundation found that the number of large banks offering free checking has declined drastically: from 96 percent in 2009, to 34.6 percent in 2011. It couldn’t be clearer that consumers are the losers in this situation.
Dodd-Frank has also created unaccountable government agencies, like the Consumer Financial Protection Bureau, and has granted broad, unchecked authority to the Federal Reserve. The Federal Reserve, which has refused an audit of its own activities, announced last year that it is moving into the electronic payments sector with what it calls “real time ACH.” The idea of a regulator like the Fed competing with the private companies it regulates is a chilling reminder of how unaccountably government agencies behave.
As is so often the case with Washington “fixes”, Dodd-Frank seems to have created more problems than it solved. The thicket of red tape it has spun and its unknown costs remain a drag on the economy, contributing to uncertainty and skepticism among investors. Passage of Dodd-Frank was a knee-jerk reaction by Congress, one that resulted in a raft of unintended consequences. This should serve as a lesson to legislators that sweeping top-down regulations do more harm than good. More feasible market based solutions that are sensitive to what both consumers and businesses call for are likely to yield better results.
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