The House on Tuesday chiseled away at the 2010 Dodd-Frank law, which nearly a decade ago tipped a ton of regulations down on the financial sector and, at the same time, made the “moat” protecting big banks from competition even more difficult to cross.
The Republican bill is good, as far as it goes, but it doesn’t go far enough. A real reform would scrap the entire 2010 bill and replace the Democrats’ efforts at clever, complex regulations with simple rules aimed at preventing or mitigating the return of the Too Big to Fail problem we saw during the financial crisis and subsequent bailout.
Regulation tends to dampen competition and entrench the biggest players. That’s one reason Dodd-Frank was obviously counterproductive from the beginning. JP Morgan CEO Jamie Dimon told shareholders that Dodd-Frank widened the “moat” protecting the company from competition.
Goldman Sachs CEO Lloyd Blankfein predicted, during the bill’s debate in Congress, that Goldman “will be among the biggest beneficiaries of reform.” After the bill passed, Blankfein bragged, “More intense regulatory and technology requirements have raised the barriers to entry higher than at any other time in modern history.”
That isn’t a good thing for a thriving market economy. The rate of new banks entering the market slowed to a crawl after Dodd-Frank.
In the first four years of Dodd-Frank, community banks also lost 12 percent of their market share, a far faster rate of closure than in the months between the crisis and Dodd-Frank’s passage. “Community banks generally are relationship banks,” Harvard Kennedy School scholar Marshall Lux explained in his study of Dodd-Frank. “Their competitive advantage is a knowledge and history of their customers and a willingness to be flexible.” He added in parentheses: “This is sometimes a problem, particularly in a regulatory system that reflects big bank processes, which are transactional, quantitative, and dependent on standardization and mark-to-market accounting practices.”
Compliance is costly, and the big guys have been more easily able to afford it. They could afford to hire lobbyists and lawyers drawn from congressional staff who wrote the bill and the bureaucrats who implemented it. The small guys couldn’t do those things. The result was yet more consolidation of the industry, which surely doesn’t alleviate Too Big to Fail or reduce legitimate worries about systemic risk.
That’s why big banks, despite their eagerness to peel back some of Dodd-Frank, were resisting the push to repeal it altogether. “I wouldn’t want regulation to be repealed in total,” Blankfein said when Trump came into office.
Unfortunately, this may be why the GOP bill doesn’t actually repeal Dodd-Frank. It leaves in place many of its biggest provisions. It alleviates some anti-competitive effects by providing regulatory relief to community banks. This is salutary, and we hope it spurs a renaissance in community banks, which can help people too small for behemoths to notice. Such banks don’t rely on bailouts and don’t pose a systemic risk to the economy.
Republicans control Congress, and they ought to do more. They should disregard the financial titans who enjoy the anticompetitive benefits of regulation and scrap Dodd-Frank, replacing its clever, nuanced, “smart” regulations with simpler rules.
An old measure, cosponsored by former Sen. David Vitter and Sen. Sherrod Brown, D-Ohio, sought to mitigate the Too Big to Fail problem by simply cutting off federal benefits for banks above a certain size. That was a superior proposal, because simpler rules are harder to game.
We understand that simplifying banking regulations would be bad for the career prospects of Republican congressmen heading into the private sector, and for their banking aides now looking for a lobbying gig. But it would benefit economic stability and the common good.
So, Republicans are not wrong to vote to pass the current bill. But don’t call it Dodd-Frank repeal. Go further, and faster, please.
