As the Trump administration continues to reassess and rework much of the previous administration’s policies, the fate of the largely debated Dodd-Frank legislation remains up in the air. The administration has made the stance clear on the future of regulation, recently using an executive order to pull back on burdensome regulatory requirements across the board. As an outspoken critic of Dodd-Frank, we can expect the president to push for a fairly substantial overhaul of the legislation.
The question is: what will a rollback of Dodd-Frank actually look like, and what potential impacts might it have on the banking industry and small businesses?
With the law having generated more than 20,000 pages of regulations, it’s difficult to pinpoint how and where we’ll see the bulk of reform. Despite the administration’s intent to dismantle it, it’s highly unlikely that Dodd-Frank will be completely thrown away. The financial industry needs regulation; some level of oversight is necessary to ensure economic stability and security. The challenge is figuring out where to draw those lines and how to strike the right balance.
What the U.S. has in place now is not the right balance. We’ve seen the number of banks in the U.S. steeply decline year over year, as smaller banks fold to regulatory pressures or undergo M&A in order to absorb compliance costs. Recent data from the Federal Deposit Insurance Corporation shows that the number of federally insured banks has dropped from 7,357 in 2011 to 5,980 in 2016. While some of the complex regulations surrounding Dodd-Frank do not apply to community banks such as mine, ConnectOne, the legislation has created a “trickle down” effect that has vastly impacted other community banks’ abilities to grow and provide loans for small business owners.
As President Trump and congressional leaders begin to build a framework around regulatory reform, here is what they should be focused on:
Tailored regulations: Regulation should not be based solely on the size of banks, but rather the complexity and risk profile of individual banks. For example, a $5 billion bank may be riskier than a $10 billion bank, but under Dodd-Frank the $10 billion bank is automatically subject to more regulation. If we were to tailor regulation to risk and not just size, community banks with less risks wouldn’t have to deal with a swarm of unnecessary compliance costs. The U.S. should therefore eliminate or substantially move both the $10 billion and $50 billion thresholds for enhanced regulation.
Remove the red tape: Currently, the reporting requirements of Dodd-Frank are too onerous for a small bank with limited staff to keep up with. Regulators have broad authority to request reports or “other information” from any bank at any time, requiring banks to compile and report additional data fields. The Home Mortgage Disclosure Act (HMDA) for example, has now significantly increased reporting requirements imposed on banks since the implementation of Dodd-Frank. The sheer amount of reporting, paperwork and information community banks must provide at any time taps resources and stifles growth.
Eliminate overlapping rules: Banks are now subject to overlapping rules. Banks may follow the Bureau’s rules but still be cited by a prudential regulator for matters requiring attention.
Give community banks back decision-making power: We need to revisit “Know Your Customer” standards. Dodd-Frank has made it much more difficult to tailor loans and deposit products to customers because regulators will always favor standardized products. The key differentiator of community banks is the fact that they have a pulse on the local community and understand the businesses and local market variables that are not necessarily plugged into a loan algorithm. They should, therefore, have the ability to assess the risk based on these variables and tailor loans for their client base and niches within their client base.
When looking at Dodd-Frank and regulatory reform as a whole, the ideal of completely “dismantling” or eliminating the law will create chaos in a stabilizing marketplace. However, as currently constructed the law has swung the pendulum towards overregulation, vastly constraining America’s community banks which provide the much-needed fuel for the nation’s economic growth. The above measures are pragmatic solutions to easing these burdens that politicians on both sides of the aisle should come together on to help community banks and small businesses grow.
Frank Sorrentino is CEO of ConnectOne Bank based in New Jersey.