The Great Recession ended in 2009, but its effects persist. Nowhere is this more evident than in the current debate surrounding the Dodd-Frank Wall Street Reform and Consumer Protection Act. Eight years after the act was instituted, a Dodd-Frank repeal movement has cast the future of the regulations into uncertainty.
The move toward repeal
Created in 2010, the Dodd-Frank Act attracted supporters who demanded greater oversight of the country's financial institutions. Proponents believed the act would safeguard Americans from future economic catastrophes by restricting banks' abilities to engage in speculative trading, establishing regulatory bodies that could intervene if large banks threatened the country's financial stability, and cracking down on predatory lending, as outlined by the Commodity Futures Trading Commission.
Although the Dodd-Frank Act was designed to insulate the U.S. from a repeat meltdown, the act hasn't been without detractors. Critics have long argued that despite its good intentions, the law reduced liquidity and hindered growth, effects that would ultimately create hardships for the American public. Now, with a Republican president and a GOP-led Congress in power, those critics see light at the end of the tunnel, as President Trump appears to be making good on his promise to enforce a Dodd-Frank repeal.
While many Republicans have vocally opposed the 2010 act since its inception, lawmakers on both sides of the aisle have pledged their support for the new Economic Growth, Regulatory Relief, and Consumer Protection Act, which was introduced by Idaho Senator Mike Crapo.
The deregulatory act would raise the threshold at which banks are subject to increased oversight, among other stipulations, according to The New Republic. Currently, any bank with $50 billion or more in assets is held to stringent regulatory standards. If the new bill passes, only banks with $250 billion or more will face tougher regulations, exempting the vast majority of U.S. banks. Opponents to the act say it's far too lenient, particularly where larger financial institutions are concerned. However, looser regulations could provide badly needed relief to regional and community banks.
What a Dodd-Frank repeal means for regional banks
Supporters of a Dodd-Frank repeal argue that the regulatory compliance standards imposed by the 2010 act unduly burdened small banks, constraining their abilities to lend to average Americans. However well-intentioned they may be, increased compliance standards mean significant increases in expenses. In the years following the act's passage, one in five small banks shut down, averaging at least one closure per business day, according to Politico.
Troublingly, community banks serve as lifelines for average consumers, particularly during lean economic periods. For instance, they're the first line of defense for small business owners who need access to credit. But in theory, a Dodd-Frank reform will ease the situation, says The New York Times. If a new law addresses the unique circumstances of small banks by reducing their compliance standards and allowing them more autonomy in their account creation processes, regional institutions may see more prosperous times ahead, according to Fortune. Under the proposed bill, smaller banks will be required to hold less capital and would be subject to less frequent stress tests (at present, they must submit to the tests once a year).
How banks can prepare for regulatory changes
Passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act is not a foregone conclusion, and it could get caught up in partisan haggling. But with leaders on both sides of the political aisle agreeing that changes are needed, especially where smaller banks are concerned, some version of a Dodd-Frank repeal seems likely.
Given that so many small banks and credit unions were forced to close as they lost money and market share, those that survived should be focusing on building back up in sustainable ways.
Regional banks that expect regulatory shifts in their favor can prepare for the new law by assessing their current compliance expenditures and operational pain points and determining how they might reallocate funds. They can also assess their lending standards and run calculations on the types of loans they might make going forward.
Although the country's biggest banks bear the brunt of the blame for the financial crisis, subprime mortgages from local banks contributed to the near-collapse, notes The Washington Post. Small banks and credit unions provide invaluable services to their communities, but they should take any new regulations as an opportunity to make better decisions for themselves and the customers that rely on them.
Support for the new bill is far from unanimous, and further changes could lie ahead if Republicans lose control of Congress following the midterm elections. But given the challenges regional banks faced under the original Dodd-Frank Act, they would do well to act swiftly if new regulations pass in their favor.
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