Dodd-Frank Two Years Later: Call It Cope and Change
Congress adopted the Dodd-Frank Act in July 2010, fundamentally changing the nature of supervision of U.S. financial institutions and their products. The American Bankers Association reports that 7,244 pages of proposed and final rules have been published to implement Dodd-Frank—and thousands more are still to come. Many of those rules do not directly affect community banks (banks under $10 billion in assets), but the level and quality of regulation is impacting business strategy at banks of all sizes.The implementation of Dodd-Frank will not be complete for years to come—long after Sen. Dodd and Representative Frank have leave office in January [both have announced their retirements].
Dodd-Frank affects banks directly and indirectly in myriad ways. Capital requirements, changes in FDIC insurance coverage, the continuing burden of FDIC assessments, mortgage-origination changes, limitations on compensation for mortgage originators and executives, limitations on interchange income for large banks (widely expected to trickle down to community banks), new regulatory structure for services provided to municipalities, overdraft charge disclosures and limitations, a zealous focus on banks’ reliance on third parties and systemic risk management—the list goes on and on.
As a result, banks are coping with increased compliance costs and reduction in fee income. These issues are already affecting the way banks operate, make decisions and provide services to their customers. The cost of managing this kind of change is enormous. Banks must hire more compliance and risk management staff, and many are developing new information-management systems to cope. When IT costs and staffing increase, reporting requirements and disclosures change, and uncertainty surrounds the products offered, banks must divert resources to handle these issues, creating pressure on earnings and capital.
The establishment of the Consumer Financial Protection Bureau is a significant factor in increased compliance costs. Dodd-Frank transferred responsibility for implementing and enforcing most federal consumer protection laws to the bureau. Its approach to regulation affects every U.S. financial institution, even smaller institutions which it does not directly supervise. The bureau is imposing additional costly recordkeeping and reporting requirements relating to consumers and small businesses and is actively pushing banks to provide “simpler” products to consumers, which may make it more difficult to provide tailored, unique or innovative products to customers. Practices that the bureau deems to be unfair, deceptive or “abusive” are subject to attack by the bureau. The “abusive” standard is a new one, creating regulatory risk for banks and significantly increasing litigation risk.
Dodd-Frank has trimmed fee income, particularly on overdraft fees and “interchange” merchant fees on debit-card sales. The Durbin Amendment to Dodd-Frank imposes a cap on interchange and permits merchants to route debit-card transactions in the least costly manner. Estimated revenue loss for banks: $6.6 billion.
These regulatory changes will, of course, affect customers, too. The focus on compliance is likely to create more standardized products, making it more difficult for a bank to provide unique and innovative products, tailored to the needs of a particular customer. The increased focus on risk and compliance management may require more documentation from customers and more stringent oversight of bank/customer relationships. Additionally, the compliance burden associated with some products, such as mortgages, is causing some banks to cease offering those products.
Lost fee income must be replaced, and one approach for that is through additional fees for services—charging consumer and business customers for the services they use, such as new or increased fees for checking accounts. Another approach to replacing lost income streams is developing new or expanded products and services—wealth-management programs, for example, or payroll cards, gift cards and other prepaid programs.
The Dodd-Frank coping process is under way, and is proving to be painful. Banks will, of course, ultimately absorb the torrent of new regulations. They may develop better information systems and new compliance management systems, streamline their products, and offer only products and services that they determine they can manage in the new regulatory paradigm. They may change some of the ways they interact with customers. Successful banks will balance the need for short-term revenues with long-term strategic investments to provide long-term capacity to cope with the one constant in banking—change.
Karen Garrett is a partner in the financial services division of Stinson Morrison Hecker in Kansas City.
P | 913.235.2000
E | kgarrett@stinson.com
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