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Dodd-Frank Is in Trouble – and for Good Reason

March 27, 2018 in Economics

By Diego Zuluaga

Diego Zuluaga

If legislation were judged on length and complexity then the
Dodd-Frank Act, passed in the wake of the last financial crisis,
would constitute an unambiguous triumph.

Alas, the correlation tends to run in the opposite direction.
The US Bill of Rights, that most influential and long-standing of
modern constitutional documents, fits within a page of A4. The
post-2008 financial law, by contrast, is 849 pages long and
estimated to have introduced 27,278 new regulatory restrictions.

Just eight years after its passage, Dodd-Frank is unravelling.
Gone are the days when the Democrats held the White House and both
chambers of Congress — and when, buttressed by public ire
following the 2008 bailouts, they were able to pass the most
sweeping piece of financial legislation since the Great Depression.
President Obama then proclaimed confidently that “this reform
will help foster innovation, not hamper it… unless your business
model depends on cutting corners or bilking your customers,
you’ve got nothing to fear from reform.”

Dodd-Frank, in fact,
seems to have accelerated the decline of small U.S. banks by
indiscriminately piling new regulatory restrictions on
them.

But Dodd-Frank did much more than attempt to curtail bad
practices. It eliminated previous regulatory agencies and added a
slew of new ones. It established a fresh regime for banks deemed of
systemic importance. The law also altered mortgage lending rules,
seeking to better reflect the risk of these loans on bank balance
sheets. It introduced new regulations on consumer lending,
including a cap on debit card fees. It mandated the registration of
hedge funds and required added disclosures for traded
securities.

Dodd-Frank was a technocrat’s dream in its breadth and
scope. No crisis-era stone was left unturned, and a great many
other future contingencies were addressed.

But the results have been disappointing. A decade after the
downturn began, America’s biggest financial institutions are larger
than ever, accounting for 44 per cent of all bank assets. Dodd-Frank, in
fact, seems to have accelerated the decline of small U.S. banks by
indiscriminately piling new regulatory restrictions on them. Bank
entry, in particular, has ground to a halt, with new bank charters
falling from 100 a year pre-crisis to only six in the entire post-crash period. In
the meantime, 1,917 incumbent banks have disappeared as a
result of merger or failure.

High market concentration, on its own, is neither good nor bad.
Bigger banks are better able to diversify and take advantage of
scale economies. Moreover, there is reason to believe that America
has historically had too many, not too few, banks as a result of
state-level restrictions on …read more

Source: OP-EDS

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