Freshly-Trimmed Dodd-Frank Can Now Be Tailored Toward Its Intended Targets

Correct anybody who tells you that Congress has voted to repeal Dodd-Frank, or even overhaul it completely. The changes to the regulatory banking law that has cemented its status in the lexicon of bankers and politicians alike can only be described, by those being honest, as modest.

Typically, it’s fair to be wary of any bill, policy, or action that has bipartisan support. In 2018, the Venn diagram overlap of Democrat and Republican agreement is so slim that anything both parties get behind usually stinks to high heaven. But an analysis of what has been trimmed from Dodd-Frank, and, importantly, what has been left in the law reveals that the bill passed to ease regulations on small and mid-sized banks was merely a compromise.

Many Democrats wanted Dodd-Frank to remain untouched as a matter of principle. But many more Republicans would have liked to see the latest regulation-easing bill go significantly further, and have received assurances that, in the not-too-distant future, they will be permitted to vote on a bill that strips down the post-Recession era regulation even further.

Naturally, you’ve got your partisan statements of support and condemnation clouding a more complex debate. The bombastic Rep. Maxine Waters (D., Calif.), said the legislation “benefits Wall Street and the nation’s largest banks, which are posting record profits.”

Critics – though not Maxine Waters, whose analysis will certainly go no further – could cite FDIC statistics in making the case that small and mid-sized “community” banks are doing just fine. The FDIC characterizes these community banks as, essentially, locally operating financial institutions, meaning that they can vary greatly by size and scope, but none of which approach the level of the “too big to fail” institutions.

‘…community banks focus on providing traditional banking services in their local communities. They obtain most of their core deposits locally and make many of their loans to local businesses.’ (

Also, according to the FDIC, community banks’ net income increased by 17.7% in the first quarter of 2018 from the first quarter of 2017, a strong positive amidst the overall banking revenue increase of 27.5% percent during that period. This is likely due in part to heightened interest rates and the Trump tax cuts, but it also could lead some to conclude that the banks, as it currently stands, don’t need any additional help.

Meanwhile, many on the right are hailing it as an unequivocally positive step toward a de-regulated, free market banking industry mirroring the image of Milton Friedman. They would label Waters’ and her like-minded peers’ stance as short-sighted. It’s the adverse times that will determine how much regulation is too much regulation, and those are the times when community banks face potential closure. Right now is not one of those times, and thus is not an appropriate time to measure the need to excise certain Dodd-Frank regulations.

As of now, an analysis that falls somewhere in the middle of those arguments, a bit closer to the right side, is appropriate. The “too big to fail” banks are bestowed with this title fairly, and they have proven time and again that, left to their own (free market) devices, they will act in their own self-interest, even if that means acting irresponsibly, steering investors astray knowing that, when crisis hits, the banks will be bailed out in part or full by the federal government and the tax dollars of many of the same investors whose funds they played a central role in squandering.

They need to be regulated, but it must be smart, targeted regulation that doesn’t lump in community banks with the Goldman Sachs or HSBC’s of the world. That, in a word, is the apparent aim of this latest bill. And, overall, it’s a positive aim, assuming that it’s not a step towards the lack of oversight that allowed for the sub-prime mortgage lending crisis to repeat itself in a slightly altered form.

Republicans shouldn’t hold their breath on watering down the bill once again. Pro-regulation Democrats will likely point to this Tuesday’s vote as a point of compromise, and portray any future attempts to strip down Dodd-Frank as unleashing the “too big to fail” banks completely. For now, Republicans should be grateful that they were able to pass, with some Democratic support, a bill aimed at freeing many small and mid-sized banks from under the rock of unduly weighty red tape.

At its core, the bill re-categorizes banks that will automatically face stricter oversight, and costlier regulatory compliance measures. Before the passage of the bill, any bank with $50 billion in assets would face more intense scrutiny. Now, that threshold will be set at $250 billion. The government also maintains the power to take over failing banks, presumably a means to avoid an all-out “bail out” of a company, instead representing more of a hostile takeover.

A succinct summary of the changes show that, overall, it’s a relatively minor tweaking of the 2010 Dodd-Frank bill:

What Stays:

  • Consumer Financial Protection Bureau structure and oversight powers
  • Orderly Liquidation Authority to take over failing financial firms
  • Financial Stability Oversight Council and its power to designate firms for stricter rules

What Goes:

  • Line for strictest bank rules raised to $250 billion in assets from $50 billion
  • Mortgage underwriting standards and Volcker trading restrictions for small banks

Many feel that preventing another Great Recession is nearly impossible. High-level banks and traders are too savvy, versed in too many terms and able to come up with new, often risky forms of investment packages that the average regulator simply can’t keep up with, much less stay ahead of. Hell, most investment bankers didn’t even realize exactly what they were buying when they purchased what were essentially junk bonds en masse, kicking off a submarining of the economy when those banks and investors realized how risky the assets they were holding really were.

But that dark saga in American banking and economics cannot be rationale to cast a regulatory blanket over all banks, big and small, indefinitely. Dodd-Frank sent a message to banks of all sizes, and some, if not many, of its regulations remain relevant and intact. But as we come to understand the impact that such regulations have on banks of differing sizes, the legislation must evolve.

Trim some red tape here, re-apply it there, etc.

Above all, give small, mostly responsible banks who know that they face closure should they not reap a profit or if they choose to invest riskily some breathing room. For those banks who know they are virtually bulletproof regardless of how wantonly they invest for short-term gains, limit their ability to free-wheel to the greatest degree possible. That’s the outcome that many are stating this latest bill achieves, if only on a relatively modest level.

“It really does take the handcuffs off of all but 13 U.S. banks,” said Dan Ryan, banking and capital markets leader at PwC, referring to the largest banks that won’t see relief due to the legislation. (WSJ)

For the most part, Americans love Robin Hood legislation, even when it applies to the banking world. Hopefully, the trimming of Dodd-Frank imposed regulations on small and mid-sized banks will mean more (responsible) loans granted to the average Joe and Jane, too.

While this updating of Dodd-Frank isn’t stealing from the rich, it can be considered keeping the Goldmans on the hook and granting relief to the lesser-known, regional and self-sustaining branches across America.

It’s not quite a story of Robin Hood and his Merry Thieves, but for many, it’s close enough to stomach.

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