August 13, 2010 – As the scope of the recently passed Dodd-Frank Act is assessed, many are convinced that the massive new regulatory burdens imposed by the new bill could cripple bank lending and restrain economic growth. Despite the good intentions of Congress, the unintended consequences of a massively complex and ambiguous financial reform bill may paralyze the financial industry for years while regulators ponder on how to implement the new law’s mandates.
At a time when many banks and businesses are struggling to survive, the cost of complying with a plethora of new regulations is certain to adversely impact profitability, growth and new job creation. Smaller banks in particular will be at a huge disadvantage to larger banks in coping with the cost of complying with a tidal wave of new regulations. The burden of regulatory compliance is also certain to raise the cost and reduce the availability of credit to individuals and small businesses.
The monstrous amount of new regulations required to be issued by numerous government bureaucracies as required by the Dodd-Frank bill was recently estimated by the law firm of Davis Polk & Wardwell, as reported by The Wall Street Journal. No fewer than 11 different federal agencies will be required to issue 243 rule-makings. The new rules issued could run into thousands of pages detailing exactly what financial institutions can and cannot do.
Agencies that will be involved in writing new regulations under the Dodd-Frank Act include the FTC, FDIC, Bureau of Consumer Financial Protection, OCC, SEC, CFTC, Office of Financial Research, Financial Stability Oversight Council, Federal Reserve and the Treasury. The agencies involved in promulgating the new rules are also certain to be subject to intense lobbying by special interest groups. The largest institutions that are able to afford the lobbyists will have a decided advantage in shaping the new rules.
The Wall Street Journal further comments on the sheer complexity of simply outlining the numerous agencies involved and the scope of regulatory decision.
In a recent note to clients, the law firm of Davis Polk & Wardwell needed more than 150 pages merely to summarize the bureaucratic ecosystem created by Dodd-Frank.
As the Davis Polk wonks put it, “U.S. financial regulators will enter an intense period of rule-making over the next 6 to 18 months, and market participants will need to make strategic decisions in an environment of regulatory uncertainty.” The lawyers needed 26 pages of flow charts merely to illustrate the timeline for implementing the new rules, the last of which will be phased in after a mere 12 years.
According to the attorneys, “The legislation is complicated and contains substantial ambiguities, many of which will not be resolved until regulations are adopted, and even then, many questions are likely to persist that will require consultation with the staffs of the various agencies involved.”
The timing of Dodd-Frank could hardly be worse for the fragile recovery. A new survey by the Vistage consulting group of small and midsize company CEOs finds that “uncertainty” about the economy is by far the most significant business issue they face. Of the more than 1,600 CEOs surveyed, 87% said the federal government doesn’t understand the challenges confronting American companies.
Will the Dodd-Frank Act make the banking industry immune from another financial meltdown? Past history provides little confidence going forward. Prior to the financial crisis numerous federal and state agencies had broad regulatory powers over the financial industry. When banks engaged in unsafe and unsound lending practices and allowed an appalling deterioration in underwriting standards, regulators turned a blind eye. Trillions of dollars in lending to borrowers with no capacity to repay their debts resulted in defaults that almost destroyed the US financial system. Now, after the damage has been done, the risk of zealous over regulation may be the biggest threat to increased lending and US economic recovery.