Passed to “solve” the problems undergirding the financial crisis of 2008, the Dodd-Frank law has dealt a crushing blow to Americans of all stripes in its overzealous regulatory war on the banks and other financial institutions. Millennials especially have been caught in the crossfire. Fortunately, there is hope for relief.
The Senate voted to proceed on a bill Tuesday that aims at freeing most community lenders from the burdensome regulations of Dodd-Frank. But you wouldn’t know that by listening to Sen. Elizabeth Warren, D-Mass., or her progressive cohort.
In an email to her supporters Warren warned that “the bank lobbyists are getting ready to pop champagne and light their cigars.” Sen. Sherrod Brown, D-Ohio, has criticized the reform on Twitter, saying it will cost taxpayers and reminding us all that “Americans shouldn’t have to pay for favors to Wall Street, foreign megabanks, and their lobbyists.” Brown also accused Wall Street of having “collective amnesia” about how awful the financial crisis was for the American people.
These sorts of statements are nothing more than partisan posturing because, in this especially divided era of partisan politics, the bill has both Republican and Democratic supporters. Sixteen Democrats and one independent voted “yea” to proceed on the reform bill, signaling a broad understanding that Dodd-Frank’s “one-size-fits-all” policies are hurting the American people and crippling future generations.
As we argue in our recent paper at the Millennial Policy Center, Dodd-Frank mostly addresses concerns pre-dating the financial crisis and does very little to tackle the underlying causes of the meltdown. Rather than confess that their bad government policies actually caused the financial crisis, politicians passed Dodd-Frank to point the finger at all private financial institutions and implement incredible regulations on both Wall Street and Main Street. As the evidence shows, this type of “one-size-fits-all” policy disproportionately hurts smaller community lenders. In fact, by 2016, there were 1,500 fewer community banks with assets below $1 billion in existence than prior to Dodd-Frank.
Those in the next generation should be especially concerned with the negative effect Dodd-Frank has already had on local and community lenders. The costs of these regulations will be passed on to the American people, and our generation in particular, in two ways.
First, raising regulatory costs means financial institutions are forced to hire more compliance officers and fewer revenue-producing employees. This is costly and especially troubling for those entering the job market. Traditionally, educational requirements for these entry-level positions were a bachelor’s degree, but more important were character qualities like being a self-starter and willingness to put in long hours. However, under Dodd-Frank, more businesses are hiring compliance officers who usually require additional education and technical skills.
Second, raising regulatory costs and hiring more compliance officers means the firm is spending less time and money on what they actually want to do — serve their customers. Ironically, this gives big Wall Street firms an advantage over their smaller and localized competitors. Since they don’t have the scale to compete, the number of community lenders will continue to shrink and limit credit access to the millennial generation.
According to Federal Deposit Insurance Corporation data, “Community banks provide 48.1 percent of small business loans issued by U.S. banks.” In sum, nearly every other entrepreneur that receives a small-business loan is doing so through a community bank.
It’s not a coincidence that entrepreneurial millennials are relying on community banks for credit. Because they tend to foster closer relationships with their customers, community banks can afford “to lend to borrowers that might not be able to get loans from larger institutions that rely more on standardized lending criteria.” Millennials, who have solid business models but may be saddled with student debt or an insufficient credit history, find these local banks especially helpful.
More successful small businesses also translate to more jobs that college graduates can fill. Per reports from the Small Business Administration, 64 percent of new private sector jobs are created by small businesses.
If the next generation of entrepreneurs and small business owners are to be successful, Congress should continue to pass bills like S.2155, because it repeals elements of Dodd-Frank and frees the market to serve the American people.
Of course, the bill could do more, like House Republicans’ Financial CHOICE Act of 2017. While S.2155 does limit the Federal Reserve’s “systemically important” designation to firms with assets above $250 billion, there remains the looming possibility of another taxpayer bailout.
The piecemeal repeal of Dodd-Frank is also undesirable, as it incentivizes individual banks to lobby for handouts. As laws become complex and open more loopholes, the risk of a federal bailout continues to rise.
According to the legislation, “banks with assets of $50-$100 billion would be immediately freed” from federal oversight required by Dodd-Frank. While banks would suddenly see compliance costs go down, consumers would see products and services become both more available and affordable. With more access to credit, small business owners could look to expand their operations and more entrepreneurs could turn their visions into reality.
The regulatory war being waged by Dodd-Frank on American financial institutions is clearly egregious in its collateral impact on the average American. Fortunately, the American people will be better protected if Congress approves legislation like S.2155.
Robert Hasler is a fellow in economic opportunity and fiscal policy at the Millennial Policy Center, a think tank based in Denver, Colorado. Jimmy Sengenberger is president and CEO of the Millennial Policy Center. Both are co-authors of a new policy paper on the financial crisis and the Dodd-Frank law. Sengenberger is also the host of “Business for Breakfast” on KDMT Denver Radio.
