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The Financial Market Reshaping Caused by Dodd-Frank Act

Published 9/22/2012

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The Dodd-Frank Wall Street Reform and Consumer Protection Act, better known as "Dodd-Frank", created an earth-shattering change in the banking industry. While the bank buildings on main street still look the same overall to consumers walking by, the level of reporting and compliance with regulatory oversight has increased tremendously. The Dodd-Frank Act gained its push and enactment as a result of the 2008 economic crash and related business credit freeze, but the Act is still going through the process of initial implementation. The most vivid piece of the Act currently is the Volcker Rule, which essentially bars bankers from using their institutional assets to "gamble" on the market via investing. The recent loss of $4 billion by JP Chase Morgan only exacerbated public sentiment that banks need more oversight.

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The Dodd-Frank Act draws a clear line between banks that are publicly listed versus those that stay private. As a result, any institutions thinking about going public for investment are now having second ideas since it also means falling under Dodd-Frank reporting and compliance requirements. As a result, an unintended consequence of the regulatory legislation may in fact mean stifling of banking growth, which in turn diminishes the amount of viable lenders in the market providing business credit.

Major Impacts of Dodd-Frank

Specifically, the Dodd-Frank Act that was passed by Congress in 2010 is unfinished. This is the first and biggest impact to banks. A good portion of the Act remains unknown, which drives bank management absolutely nuts in terms of what more definitions of regulation may be coming.

Second, local community banks and small banks essentially ended up being lumping into the same treatment as the big chain banks. Although everybody clearly understands that the corporate banks had a majority hand in the 2008 crash and most small banks had no or little involvement, the smaller players still suffer from the same new requirements anyways.

Third, banks are realizing a significant amount of new expense associated with all the various reporting required by Dodd-Frank as well implementation of compliance system to ensure proper behavior within a given bank.

Further, the Dodd-Frank Act creates the Consumer Financial Protection Bureau which continues to put out a lot of press and statements that their activities start with the premise that banks are inherently evil. It's not the way to start a new relationship, so small banks are particularly worried while larger institutions are hiring a whole new wing of lawyers to deal just with Bureau and similar regulation personnel. While the Bureau is officially supposed to focus on large banks and the Federal Deposit Insurance Corporation covers the small banks, there is no definitive line of jurisdiction between the two government agencies. As a result, many small bank executives are trying to read the tea leaves to figure out if they are dealing with two regulatory agencies or one.

Given the law that does exist, a number of large banks have also performed preemptive moves before the Act's regulation gets written. Some of the bigger names have reorganized and shifted their commercial banking to international-level divisions and away from their U.S. subsidiary branches. This in effect removes the commercial banking branch from falling under Dodd-Frank requirements. Additionally, banks have been shedding their trading desks to get away from any violations of the expected Volcker Rule and proprietary trading.

Ongoing Changes

Bankers and their lawyers will be spending years trying to comment and influence on the creation of subsequent Dodd-Frank legislation as it continues to be developed by the Federal Reserve, the Securities Exchange Commission, the FDIC and the Consumer Financial Protection Bureau. All four agencies continue to take advice and response from banks as they develop various sections, taking months to develop each part. For example, the Volcker Rule was supposed to be finalized in the first half of 2012, but it has continued to be delayed with further comment periods and development occurring. This continued flux in the game rules has banks exposed until they finally do learn what the final rules are.

The View on the Outside

To the consumer, none of the above seems to have made a difference to how they see banks. While consumers continue to pursue bank officers for forebarence approvals and workouts on foreclosures and short sales, the impact of Dodd-Frank has in practice had no real benefits to the average person. For Wall Street, on the other hand, Dodd-Frank has conceivably opened up a whole new library of information on public banks for stock analysts and fund managers. The slew of information that Dodd-Frank regulatory requirements now force banks to produce has provided a number of regular gems for investment decisions by traders. The same has created more headaches for bank executives having to provide more explanations for workouts, bad loan liabilities, forebarence cases approved, foreclosures and other bad inventory on their books now highlighted even more.


The Dodd-Frank Act represents a typical, oversized example of large government regulation that was enacted quickly by Congress and the President without anticipating all the ramifications. As a result, small community banks are finding the business environment has become harder to work in, and large banks are quickly moving to reduce the effect of the Act on their operations. While the politicians involved promised the the Dodd-Frank Act would clean up the financial houses on Wall Street, it has instead just reconfigured the playing field. And with the world's markets growing more and more global everyday, the idea of U.S.-only bank regulation is becoming passe'. Instead, large banks step outside of the backyard to avoid the new rules altogether.

Ideally, the free market should have purged out the banks that fouled up too much, letting them fail while smarter competitors take over. However, any possibility of that sort of approach happening was put to rest when the federal government made it clear with bailout funds that it would not let big banks fail. As a result, legislation in the form of the Dodd-Frank Act gets passed instead, trying to fence in behavior. The banks instead side-step and the game continues on.

Unfortunately, consumers end up paying the cost for Dodd-Frank and regulation via additional bank fees and government taxes.

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