Dodd-Frank Opt In — A Welcome First Step for Small Banks
This post was originally published in The Hill
The Trump administration’s move Friday (April 21) to put two Dodd-Frank provisions on hold for a 180-day review, and the House Republicans’ intend to reintroduce their Dodd-Frank replacement bill, confirm that financial deregulation remains a priority for the administration.
Up to now, much of the debate over whether to revise — or repeal — Dodd-Frank has focused on the excessive costs and administrative burden it placed on small banks that had little to do with the financial crisis. Beginning with first-quarter reporting, banks with less than $1 billion in total assets can opt into less onerous reporting rules regarding their condition and income (officially called FFIEC 051 Call Report). The new rules are a welcome step forward that will remove almost 40 percent of the 2,400 data points banks must provide to regulators every quarter.
The actions by both the administration and legislators reflects a clear determination to ease the unintended regulatory burden imposed by the Dodd-Frank legislation, which largely was designed to address the risks generated by large and very large banks considered “too big to fail.” Very little consideration was given to how it would affect smaller banks and the heterogeneity of a group ranging from institutions with a few million dollars in total assets to multi-trillion-dollar conglomerates. In point of fact, of the almost 6,000 banking institutions in the U.S. almost 4,800 hold less than $1 billion in total assets. Not surprisingly, this regulatory approach has been particularly hurtful to smaller banks, which played a minor role in the crisis. This sort of overreach was what macroprudential policy was meant to prevent. As the Federal Reserve’s Daniel K. Tarullo pointed out, it is important to “differentiate prudential regulation and supervision based on the varying nature of the risks posed by different groups of banks.” With developed economies recovering, regulators around the world need to revisit the regulatory response to the crisis and its impact on the financial sector, and not simply look for another territory, such as asset management, to conquer.
When it comes to financial regulation, it is important to identify the fine line between the value of stability and the price that stricter lending policies impose on the real economy. Immediately after the financial crisis, there was a need to quickly give regulators an extensive, detailed picture of financial markets. However, many of the consequences of the new regulations and requisite data-gathering could not be fully understood beforehand. We now know that the new regulations produced distortions in parts of the markets that were not intended or could not have been predicted as sometimes disparate rules were considered and implemented. As the economy is slowly recovering and monetary policy is fading from the spotlight, it is crucial to take a step back, analyze market behavior and ensure that these regulations meet cost-benefit criteria.
Not all of Dodd-Frank is bad, but regulators across the board recognize the need for a less disruptive approach that will reduce compliance costs for market participants large and small. The opt-out for small banks is a welcome beginning, but with more than 200 rules finalized since 2007, there is plenty to revisit. Not everything was handled well after the crisis and the impact on market structure still is not well understood, especially outside the banking sector. In the end, macroprudential policy was never meant as a one-size-fits-all solution. It’s time to return to the original intent: creation of a more flexible, fine-tuned approach that will lift costly and restrictive burdens on smaller banks that don’t have the operational and logistical assets of the big players.