The rules of deregulation: How banks can make the most of a Dodd-Frank repeal
More than 25 years ago, Bill Gates declared: “Banks are dinosaurs.” I would argue that the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 is quickly reducing them to fossil fuel status.
In his first 100 days in office, Donald Trump acted on his campaign promise to dismantle Dodd-Frank by signing an executive order that gives the U.S. Department of the Treasury authority to restructure its major provisions. The February order also directs the Treasury secretary to make sure existing laws align with administration goals to empower investors and enhance the competitiveness of companies.
Critics claim the deconstruction of Dodd-Frank will lead to the next Great Recession. But I see it as an opportunity for banks to roll out the red carpet for their customers if they elect to do so.
Pain without gain: The costs of consumer protection
According to a report released by the American Action Forum, Dodd-Frank had cost banks more than $36 billion as of July 2016—along with an additional $73 million in labor hours for processing paperwork. Bloomberg’s analysis of the report ascertained the two most expensive items to implement were: 1) margin and capital requirements for swap entities, and 2) margin requirements for uncleared swaps. Pay ratio disclosures and home mortgage disclosures also earned callouts as very costly line items.
The price tag for these increased regulation requirements is high and the costs haven’t just hit big banks. Community banks and credit unions have also endured the burden of additional bureaucracy—only they cannot cover the rising cost of remaining compliant as readily as their larger counterparts.
Smallest banks, biggest impact
As an unintended consequence, Dodd-Frank has battered community financial institutions. The Federal Reserve Bank of Minneapolis found that adding just two members to the compliance department would make a third of the smallest banks unprofitable. And a survey conducted by Mercatus Center found that the median number of compliance staff for small banks that participated in the survey increased to two employees.
It’s no surprise, then, that the number of community banks (those with less than $10 billion in assets) shrank 14 percent between Dodd-Frank’s passage in 2010 and late 2014. Because community banks and credit unions account for more than three-quarters of agricultural loans and half of small business loans, this consolidation proves especially disconcerting.
What oversight overlooks: Compliance at the cost of infrastructure
For both large and small financial institutions, Dodd-Frank negatively impacts consumers because banks have to redirect capital toward compliance that they would otherwise spend on infrastructure.
Rather than update their on boarding, relationship management and process automation system technology—and invest in tools to create a transparent, frictionless customer-bank relationship—banks under Dodd-Frank must instead direct funds toward complying with costly regulations. And many of these regulations fail to improve outcomes for customers.
Meanwhile, banks maneuver their budgets to make up margins while customers miss out on great service provided by expert customer-facing bank associates—and a smooth banking experience powered by the latest technology. Thus as the digital age unfolds, banks instead cobble together fixes with every additional high-tech must-have (online banking, mobile banking, mobile deposit, etc.).
But with the shackles of regulation removed, they could instead concentrate on the big picture and reimagine the shape of their overall infrastructure—even as the future of finance and FinTech accelerate towards us at warp speed.
When regulations fall away, banks can once again endeavor to earn the trust of the people above all else. They can prove they don’t need the added oversight as they allocate resources and budget dollars freed up by fewer regulations towards improved infrastructure—the kind that benefits customers and businesses as it streamlines and simplifies access to capital.
The question is whether banks can make the most of this moment while they have the chance? I believe the answer is, “Yes—they absolutely will.” Then they will discover that what begins as rolling out the red carpet ends in added green, and a big win, for all parties involved.
Joe Salesky serves as CEO of CRMNEXT, a global provider of customer relationship management in financial services, where he is responsible for the company’s entry into the U.S. market.