Commentary

Financial Services Deregulation

Not eight years have passed since the Dodd-Frank Act became law. But Sen. Christopher Dodd and Rep. Barney Frank, whose names headlined the gargantuan package of post-crisis financial regulations, have retired from Congress. Soon their signature legislative achievement may also become a thing of the past, as policymakers turn their attention to the barriers hampering credit and investment markets.

Dodd-Frank was meant to curb excessive risk-taking by financial institutions, curtail abusive lending practices and make financial markets more open and equitable. But so far, all it has delivered are more than 27,000 new regulatory restrictions and mandates placed on financial institutions.

The burden of new regulation has been anything but equitable, with compliance costs rising significantly for smaller banks, while they remained broadly the same for larger institutions. Lenders have not stayed put: A 2014 survey revealed that Dodd-Frank was behind many community bankers’ decisions to reduce their credit offerings. In a low-interest-rate environment where profit margins are squeezed, regulatory costs have meant that new-bank formation has dropped dramatically. Only six banks have been chartered since 2009, compared to about 100 annually before the crash.

This has affected consumers. Because community banks are responsible for half of small business loans and 77 percent of agricultural loans, their plight has meant greater hardship for some households. A study looking just at small-business lending by the four biggest banks found that unemployment had worsened, and wages remained persistently lower, because of post-crisis credit retrenchment.

Thus, reforming Dodd-Frank has become urgent. There is finally a reckoning that equating more regulation with better financial markets was a mistake. President Barack Obama’s remarks at Dodd-Frank’s passage in 2010 that “this reform will help foster innovation, not hamper it” was not prescient.

President Trump promised to “do a big number” on financial regulation, but so far the changes have been modest. The Senate’s recent reform bills ease mortgage requirements on smaller banks. Institutions with less than $250 billion in assets would no longer be regarded as too big to fail, and community banks would be spared from a ban on trading for their own account.

Regulatory rollback has been a bright spot of this administration, but financial services remain clogged by red tape. For financial innovation and credit access to reach all Americans, that must change.

Diego Zuluaga is a policy analyst at the Cato Institute’s Center for Monetary and Financial Alternatives.