Dodd-Frank Reform a Huge Dud: Why We Need to Repeal Dodd-Frank

The Great Recession was the worst financial crisis since the Great Depression. It hit millions of people across the globe as jobs and wealth disappeared. In response to this catastrophe, the United States government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). This bill was the most significant financial reform to take place in the United States since the Glass-Steaggal Act (see my analysis on that Act here). The purpose of Dodd-Frank, according to the Act itself, was to "promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail," to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and other purposes." What I would like to do today is see if Dodd-Frank accomplished its primary goals (Congressional Research Service primer on Dodd-Frank here), whether there were unintended consequences, analyze the Dodd-Frank reform bill that passed last week (S.2155, also known as the Economic Growth, Regulatory Relief, and Consumer Protection Act), and subsequently determine whether this reform bill was the best course of action.

There have been some good things to come out of Dodd-Frank. The Minnesota Federal Reserve Bank found that Dodd-Frank reduced the probability of a bailout in the next 100 years from 84 percent to 67 percent. The Wharton School of Business points out that Dodd-Frank provided oversight over payday lending, includes measures to protect retirement money savers from abuse, and has disclosure requirements on derivatives and for oil companies on their payments to foreign government. For another, the Left-leaning Center for American Progress calculated that for every dollar of funding provided to the Consumer Financial Protection Bureau (CFPB), it has returned $5 dollars to victims of financial wrongdoing (or $12 billion in total). If you want a better view of CFPB, here is my literature review of CPFB from two-and-a-half years ago.

Nevertheless, there are multiple issues to take with Dodd-Frank, as are pointed out in detailed criticisms from the Heritage Foundation and Mercatus Center (also see Brookings Institution analysis here for a mix of praise and criticism). Here are but a few I found while conducting research on the topic:

• Effects on community banks and credit unions. In December 2015, the Government Accountability Office (GAO) found that community banks and credit unions are disproportionately hurt by Dodd-Frank because they do not have the same capacity that larger banks do to handle compliance. As a result, these smaller financial institutions have reduced the availability of credit to their customers. A working paper (Lux and Greene, 2015) from Harvard University confirms the GAO findings. This paper calculated that commercial banks' assets declined at a rate more than double than that between 2006 and 2010. The authors contributed this decline to Dodd-Frank. 
• Cost of borrowing for small businesses. Evidence suggests that borrowing for small businesses became more expensive since 2010, which hampers job creation and investment (Chen et al, 2017). Another study from the National Bureau of Economic Research confirms that commercial and industrial loans dropped nine percent since Dodd-Frank, and was due to said regulations (Bordo and Duca, 2018).
• Price tag of regulatory compliance. According to the American Action Forum, eight years of Dodd-Frank has cost $38.9 billion and 82.9 million man-hours. That exceeds the $12 billion recovered by CFPB. 
• Cost to Consumers. The American Action Forum also found that Dodd-Frank is responsible for cutting revolving credit by 14.5 percent. This is important for consumers because as the World Bank discovered, there is a strong correlation between financial inclusion and economic growth or employment (Cull et al., 2014).
• Middle-Class and Mortgages. Another cost is squeezing the middle class out of the housing market. According to a study from the University of Maryland (D'Acunto and Rossi, 2016), the combination of a 3 percent cap on mortgage-related service fees and a more costly process for verifying customer's income. This change in underwriting incentivized banks to slash the number of loans at the median income and target wealthier individuals.
• Less competition in the banking sector. There is a study that took a look at Dodd-Frank's effects on bank acquisition behavior (Bindal et al., 2017). This study is important because it shows unintended consequences of Dodd-Frank creating more regulations for banks with more than $50 billion in assets. On the one hand, very small banks are more likely to partake in acquisitions. On the other hand, they make sure to stay below the $50 billion mark so that they do not get hit with Dodd-Frank regulations. This is significant because it creates a barrier to entry in the mega-bank submarket, which solidifies market share and overall power for the already-existing mega-banks. It is another example of how regulations squash the smaller business owner, protect big business owners, and artificially encourage business consolidation, thereby perpetuating the cycle.  
• Big banks are not safer. A study from Lawrence Summers, a major supporter of Dodd-Frank, concluded that big banks are not safer, even in spite of decreased leverage (Summers and Sarin, 2016).
• Financial sector not healthier. A study from the National Bureau of Economic Research suggests that it was post-crisis regulations that are strangling financial sector growth (Chousakos and Gorton, 2017).

Dodd-Frank Reform Bill and Conclusion
If you look at the reform bill, there was not much that was reformed relative to what was initially enacted in 2010. Yes, the bill is going to ease up on supervision, which is one of the major contributors to Dodd-Frank's regulatory costs (see above). It is also exempts smaller banks [with $10B or less in assets] through the community bank leverage ratio. The SIFI (Significantly Important Financial Institution) threshold increased from $50B in assets to $250B, although there are multiple caveats attached in the Senate bill. There will also be some deregulation on stress testing, i.e., companies only have to perform two stress tests instead of three. In short, the bill primarily provides targeted relief for smaller banks.

In its analysis, the Congressional Budget Office (CBO) finds that the bill will slightly increase probability of financial crisis, although it fails to qualify that further. Former Congressman Barney Frank, who was a co-author of the bill, thinks that the reform will not make a big dent into the impact of Dodd-Frank. From Frank's standpoint, that's probably a good thing. The good news is that it doesn't like the bill is going to cause catastrophe to the U.S. financial system.

I will say that although the bill goes in the right direction, it is still inadequate. Being an 849-page bill with over 27,000 regulations, Dodd-Frank still has a stranglehold on the financial markets. Even the GAO admitted that Dodd-Frank did nothing to simplify oversight over the financial sector (see below). I know that this compromise bill was passed because they could not get votes for downright repeal. However, I still contend that even in spite of certain advantages to Dodd-Frank, repeal is still a desirable goal.

For more on financial regulation reform, see analyses from Manhattan Institute and Heritage Foundation.