Over the course of the past year, we’ve spent a good bit of time navigating Dodd-Frank with you. Whether by understanding its future or discussing its impact, Dodd-Frank regulations have never been too far from our thoughts — but why?
What is Dodd-Frank?
Dodd-Frank and the Consumer Protection Act were passed in 2010 as federal law to regulate our financial industry and give more control of the banking sector to the federal government. Dodd-Frank is one of the most extensive Wall Street reforms in history and was implemented to safeguard banks from the risk-taking that originally led to the 2008 financial crisis.
Why are we talking about it now?
Earlier this year, House Financial Services Committee Chairman Rep. Jeb Hensarling, R-Texas, introduced a bill in the House that would replace the Dodd-Frank law with a “pro-growth, pro-consumer” alternative that would bring significant reforms to the CFPB, and much more. The bill, called the Financial CHOICE Act, passed out of the House Financial Services Committee in September 2016. The bill would “end taxpayer-funded bailouts of large financial institutions, relieve banks that elect to be strongly capitalized from ‘growth-strangling regulation’ that slows the economy and harms consumers, and impose tougher penalties on those who commit fraud as well as greater accountability on Washington regulators.” If Dodd-Frank is slated to be revised or even repealed, your bank could start seeing changes in regulation – and soon.
This is where it can get a little sticky.
There is so much information out there. With varying levels of reliability, it’s hard to know what to read, who to trust, what is actually happening and how it may affect your bank. That’s why today, we’re presenting you with the top five things you need to know this year about Dodd-Frank:
There is no published plan for the Dodd-Frank repeal…yet.
While the new presidential administration has made it clear that they plan to dismantle Dodd-Frank as a part of their first 100 days, there is no clear plan just yet. Some experts predict that pursuing the Financial CHOICE Act will be one of President Trump’s first moves, but changing these regulations is no simple feat. However, since Dodd-Frank regulation reform is easier than changes to say, the Affordable Care Act, we might see regulations shifted sooner than later. Making matters more interesting, certain Dodd-Frank regulations were issued at the end of the Obama administration and as such, fall under the 60-day window for CRA. That means in theory, big changes could happen even within the next few weeks. The bottom line? We wait and see.
Technology advances are far more impactful than regulations for community banks.
Technology like online banking, digital deposits, and electronic wallets tend to be more important in driving numbers than regulation, especially when it comes to Dodd-Frank. In fact, because Dodd-Frank’s Consumer Financial Protection Bureau regulations only apply to banks carrying $10 billion or more in assets, community banks are in large part unaffected by Dodd-Frank. Our research found that of the 433 commercial banks that failed between 2007 and 2014, 430 were community banks with fewer than $10 billion in assets. The FDIC’s closure costs for these community banks totaled $43 billion (out of a total of $50 billion for all commercial banks). That’s not to say community banks shouldn’t be keeping an eye on the Dodd-Frank changes. With so much uncertainty, we’re certain that the changes coming could impact everyone; regardless of your bank’s size.
The devil is in the details.
Currently a 10% capital requirement is proposed. Here’s how it would work: As you know, on one side of your bank’s balance sheet lists your assets, and on the other is your debt plus capital. The idea here is that placing a 10% capital requirement would mean a bank’s capital has to be at least 10% of its assets. Essentially, under the CHOICE Act, if a bank meets that 10-percent threshold, it’s exempt from complying with many of Dodd-Frank’s other regulations. However, experts say that one hard and fast rule isn’t the only answer, and 10% definitely isn’t high enough. Some argue that a capital requirement should be based on a bank’s size, and while that seems logical, there are still many details to be worked out.
Enforcing Dodd-Frank’s new regulations is questionable.
Under the proposed regulations, any bank that does not meet the 10% capital requirement has one year to make changes. Some sources say that’s a bit lax. A bank that has a year to meet the threshold is a bank that gets to spend a year without compliance, and chances are, once they do comply they could very well slip back under that 10% requirement. If that’s the case, this is where a regulator’s job will become invaluable. Regulators will have to hold banks’ accountable even in the toughest situations.
Did we mention — nothing is certain?
If one thing is for sure, the fate of Dodd-Frank will be an enigma for a while longer. While the wheels are already in motion for regulation changes, it’s safe to say that nothing is certain. But have no fear — we’re committed to bringing you what you need to know when you need to know it. Follow along as we dish the latest Dodd-Frank updates and more, or join our mailing list for exclusive access to new content first.