According to financial expert Ty J. Young, the Dodd-Frank Law was anything but a victory for economic recovery. While the groundbreaking financial reform act was originally designed to regulate the financial system and prevent another economic catastrophe, many believe that the act is actually doing the opposite. The reform could burden small banks with its regulations, and these small banks are something we can’t afford to lose.
The financial overhaul bill, known officially as the Dodd-Frank Wall Street Reform and Consumer Protection Act, went into law on July 21, 2010 but is still only in partial effect. The comprehensive bill has a laundry list of goals aiming to protect consumers and ensure a stable financial market.
But, as The Wall Street Journal points out, what started as a mission to “streamline and modernize the financial system” actually resulted in “2,300 pages of new agencies and new powers for the very authorities that fomented the financial crisis.” The anxious environment spurred by the financial crisis didn’t get much assuagement from a bill that is filled with costly regulations for small businesses, the article asserts.
One of the main tenets of the Dodd-Frank Act is that it monitors companies deemed “too big to fail.” The Financial Stability Oversight Council and Orderly Liquidation Authority is granted the ability to break up large banks, liquidate financially-weak firms, and protect the financial system from the threat of these entities. The problem with this, according to Hester Peirce of the U.S. World and News Report, is that it codifies the too-big-to-fail “rather than eliminating the market’s expectation that certain big financial firms are too big to fail.” This establishes a set of too-big-to-fail entities that are selected for special regulation.
The ramifications for small, community banks are what really have economic experts fuming. According to Ty J. Young, Dodd-Frank is making big banks bigger as it prevents smaller banks from utilizing the open window policy.
“This is leading to larger banks being able to lend at lower rates. Smaller banks are going out of a business as a result. Dodd Frank is having the opposite effect as intended, and is reinforcing the ‘too big to fail’ atmosphere that it was supposed to be curing,” Young explains.
Tanya Marsh of the American Enterprise Institute notes that the act increases the power of big banks by giving them a competitive advantage through greater asset consolidation. In standardizing financial products, Dodd-Frank makes it harder for people to get loans from community banks, “which undermines the relationship banking model and decreases the diversity of consumer banking options.”
“As a result, credit and banking services will be eliminated or become more expensive for small businesses, those living in rural communities, and millions of ‘informationally opaque’ American consumers and businesses that are challenging or less profitable for large banks to serve,” Marsh elaborates.
There’s plenty of reason to be concerned about what this law could do to small banks. According to the American Enterprise Institute, community banks provide 48.1 percent of small-business loans in the United States. They’re responsible for handing out 43.8 percent of farmland loans, 34.7 percent of commercial real estate loans, and 15.7 percent of residential mortgage lending. In fact, more than 1,200 counties across America – totaling 16 million people – would have a lot of trouble doing any banking at all if they lost access to such institutions.
And as the American Enterprise Institute points out, community banks did not engage in the subprime lending that caused the financial crisis, nor did they commit any other acts that led up to the crisis. The potential harm to community banks is one reason why many experts believe the financial overhaul act could ultimately lead to another economic collapse.
Posing regulatory threats to small banks isn’t the only problem that this new form bill will introduce, according to Ty J. Young. Driven by its big-government goals, the regulation establishes a number of bureaucracies that have little oversight from the people. It also grants more power to the Securities and Exchange Commission. Young adds that it is particularly concerning that the government has unregulated power to seize and restructure companies at will. The criteria for when such actions may be taken are not well-defined.
But we’re talking about a 2,300-page document here. There has to be at least some positive change that came out of all that comprehensive reform. One case in point is rules that require improved communicational clarity in mortgage lending and credit card terms and paperwork. With new regulations, lenders also have less incentive to push buyers into loans they can’t afford. All of these changes are helping Americans manage their money more wisely and pushing institutions to act more transparently, argues financial executive Ty J. Young.
Despite its purported intentions, the financial reform act could lead to more economic issues than it was trying to solve in the first place. As economic analysts Ty J. Young and Hester Peirce assert, the federal government should be sure to foster and protect small businesses if it intends to regulate against big businesses.
Carly Fiske contributed to this article.