By Brett Linley
With Richard Cordray’s resignation, the Consumer Financial Protection Bureau (CFPB) has been making the news. With Acting Director Mick Mulvaney in and hiring frozen, the agency’s future is uncertain. Consumers, and the public at large, would be so lucky if the notorious consumer watchdog ended. However, given the circumstances, it’s worth looking at what gave us the CFPB.
The answer, in this case, is Dodd-Frank. Following the 2008 financial crisis, Congress created Dodd-Frank to protect Americans and our financial systems. In theory, the big banks would no longer be able to get away with gambling at taxpayer expense.
In reality, of course, the answer is much more complicated than that. The popular wisdom tells us that all the big financial players hate Dodd-Frank. Perhaps, at the beginning, this was true. With a whole new slew of financial regulations, new compliance officers were necessary.
At this point in time, however, the big banks have already invested in these costs. They already have the fancy lawyers on staff. It’s another story for the small banks. In a Mercatus Center study, the authors found that the median number of small bank compliance officers rose from one to two. Consider this from the perspective of those banks.
Paying an extra salary just to sort through the laws is a waste of economic resources. While the slow economy has been a factor, these layers of regulations have been crippling to community banks. The numbers appear to back this up.
As ABA President and CEO noted for Politico, “more than one in five U.S. banks have disappeared — 1,708, or more than one every business day — since Dodd-Frank was enacted.” The Federal Reserve reported that only 7 new small banks opened between 2009 and 2013.
For big banks, knocking out competition is only one perk of Dodd-Frank.
“Too Big To Fail” and Bailouts Find a Home in Dodd-Frank
Something that riled up taxpayers following the financial crisis, and rightly so, was how big banks received a slew of bailouts. This was something Dodd-Frank attempted to fix. The idea of “Too Big to Fail,” with big banks gambling with house money, needed to go.
However, this is hardly what we received. Instead, we got the Financial Stability Oversight Council (FSOC). Among many other powers, FSOC can hand out the label “Systematically Important Financial Institution” (SIFI). The fact that FSOC can use this label without any clear guidelines, and with no clear process for banks to get off the list, is almost the smallest problem.
The biggest problem, in reality, is that we got “Too Big to Fail” back under a new name. Proponents will point out that, yes, SIFIs have to follow stricter rules than before. With those rules, costs surely follow. The potential benefits, though, are much greater.
It seems naïve to believe that if the government thinks you’re important, they’ll simply let you go under. In a “wink and nod” fashion, Dodd-Frank allows the state to signal who is “Too Big to Fail.” What’s worse, think of a company like Metlife that recently beat the SIFI label. The government obviously thought they’re important. Now, the market is liable to believe that even without the added rules, they’ll still be failure-proof.
An added bonus for the wealthy is how the FDIC’s per-account cap for deposit insurance rose to $250,000. Dulling market discipline, bank accounts are now protected far beyond the median account size of $4,100 in checking. This is nothing more than a bailout for the rich.
What’s more, the process of “brokering deposits” exacerbates the problem further. By distributing their holdings across multiple accounts, the wealthy can circumvent the $250,000 limit. It isn’t necessary to reduce the FDIC’s bailout coverage to $0. However, we cannot ignore how the system, fostered by Dodd-Frank, is a boon for the wealthy at the expense of the middle class.
Take the CEO’s Word at Face Value
It would take more space than reasonable to explain the different ways in which Dodd-Frank cripples the economy. For now, it’s worth simply looking at those with the most skin in the game. While there’s a big, and usually well-founded, tendancy to distrust the words of corporate executives, it’s worth listening now.
When people think of Goldman Sachs, they usually assume that the bank opposes all financial regulations. In this case, not so much. Goldman CEO Lloyd Blankfein perhaps put it better than anyone else:
“More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history. This is an expensive business to be in, if you don’t have the market share in scale. Consider the numerous business exits that have been announced by our peers as they reassessed their competitive positioning and relative returns.”
JP Morgan CEO Jamie Dimon essentially confirmed as much, regarding his feelings on Dodd-Frank. “We’re not asking for the wholesale throwing out of Dodd-Frank,” he said. It’s not hard to see why.
The big banks are bigger than before 2008, with five banks controlling over 44% of the market share. Between 2010 and 2014, small banks have lost a market share at double the rate they did between 2006 and 2010. Believing that big banks love many of the rules that govern them is a hard pill to swallow. When it comes to Dodd-Frank, however, the proof is in the pudding.