Who is Dodd Frank? And what does President Trump have against him?
The first question is easy: Dodd-Frank is the name given to the sweeping 2010 financial regulations passed by the Obama administration – sponsored by former Senator Christopher Dodd (D-CT) and former Representative Barney Frank (D-MA). As for the second question, President Trump has plenty of reasons to want to amend the act they sponsored. His reasoning likely has little or nothing to do with party affiliation.
At its core, the Dodd-Frank Wall Street Reform and Consumer Protection Act was designed to reduce risk in financial markets. After the Great Recession in 2008, the Democrats controlled the White House and both houses of Congress and used the opportunity to enact this massive piece of banking legislation in the hopes of preventing another crisis. Those in the banking industry have cried foul ever since as the legislation has been known to strangle small lending institutions.
The act is well over two thousand pages long, and covers everything from consumer protections, to lending rules, to limits on what banks can do with their money. Some of the reforms are commendable, but most are misguided attempts designed to prevent another financial meltdown, and lessen the impact to the economy should one occur in spite of the new controls. All of the changes add to the size and scope of the federal government — to the tune of two hundred and twenty-five new rules across a total of eleven federal agencies.
The problem with many of the requirements is their “one size fits all” nature. Think of a Manhattan skyscraper full of apartments and condos. Now imagine a two-story apartment building out in the suburbs with all of a dozen units. Should both structures be required to adhere to the same regulations? Some laws such as tenant discrimination rules should certainly apply equally. But others simply do not make sense on a smaller scale.
The principal issue with Dodd-Frank, and an area the president is attempting to address, is the fact that banks of different sizes are forced to comply with the same set of regulations. The burden this places on small community banks is immense and has stifled economic growth over the past several years. Smaller banks are more likely to lend money to small businesses and budding entrepreneurs than large international banks; however, they have been unable to lend as much under Dodd-Frank as they would have otherwise.
Many of these smaller institutions have even been forced to close their doors in the dark days since Dodd-Frank was passed. The number of community banks declined by fourteen percent in the four years after Dodd-Frank was passed. The Mercatus Center at George Mason University came to a similar conclusion in a 2015 study:
Dodd-Frank poses considerable challenges for small banks. While bank concentration itself is not bad, increasing regulatory burdens should not be the driver of regulatory consolidation. Dodd-Frank is costly for large banks, too, but regulatory compliance can be a particular challenge for small banks with limited access to compliance expertise. Regulatory expenses absorb a larger percentage of small banks’ budgets than that of their larger counterparts’ budgets.
Just like construction, our economy needs a few basic ground rules. Dishonest builders and bankers would take advantage of people otherwise, and their greed could have devastating consequences. But to think that a circuit breaker needs to be the same size in a skyscraper as in a duplex is absurd. And so it seems, President Trump is finally bringing some common sense back to banking regulations.