Five Questions: The Rollback of Bank Regulations in the Dodd-Frank Act

By UM News

Five Questions: The Rollback of Bank Regulations in the Dodd-Frank Act

By UM News
UM News interviewed a Miami Business School professor to learn more about claims that the changes could trigger another financial crisis.

Bank regulations adopted in the wake of the 2008 financial crisis are rolling back under a bipartisan bill approved by Congress and signed by President Trump last month. The effects of freeing thousands of banks from the stricter federal oversight imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act are a matter of debate, with some predicting wide-ranging impacts on the banking industry and consumers. 

Gennaro BernileMiami Business School Associate Professor Gennaro Bernile teaches in the finance department and was a visiting scholar at the U.S. Securities and Exchange Commission (SEC) between 2008 and 2010, when the act was implemented. While at the SEC, he was engaged in both rule making and enforcement activities. UM News asked Bernile about the proposed deregulation.

UM News: Will easing the regulations on banks put us in peril for another financial crisis similar to the one in 2008?

Gennaro Bernile: Well, imposing or easing of regulations ultimately entails a trade-off. The proponents of easing typically contend that regulation introduces frictions that impede efficiency, as opposed to those who may view regulation as a way to deal with existing market imperfections/frictions that impede efficiency. Both arguments usually have some merit. Restricting the flexibility of banks via regulation may help reduce systemic risk. However, to your specific question, it presumes that the 2008 crisis would never have happened had Dodd-Frank been in place. I dare say this is less than obvious.

UM News: Who benefits the most from deregulation of this sort—banks, consumers, credit unions?

Bernile: Once again, this depends on whom you ask.

Proponents will argue that the current rollback mainly benefits small and regional banks that are presumably being squeezed unnecessarily by the stringent requirements of the regulation that should instead apply only to the largest entities. As such, investors and potentially customers of these entities may benefit from the rollback.

The other side points to the fact that the rollback weakens some of the provisions aimed at preventing the sudden collapse of the biggest banks. In turn, this would pave the way to abuses and risky behaviors that underlied the 2008 crisis. If you go by this logic, the implication is that the big banks and their shareholders would benefit from the rollback, at least in the short term. But, then in the end, everybody else loses when another severe crisis happens.

UM News: What does the partial repeal mean to the regular consumer? Is there a move afoot to totally repeal the Dodd-Frank law?

Bernile: It is hard to predict precisely what the current rollback will mean for consumers. However, I am not aware of a plan or even intention to repeal Dodd-Frank tout court. My understanding is that the focus is specifically on the part of the regulation pertaining to restrictions on banks.

To the extent that small and regional banks are less worried about growing too large and therefore becoming subject to the requirements of the regulation, it seems plausible that a wave of consolidations among these entities may occur. As it’s typically the case, consolidations are a double-edged sword for consumers. They potentially limit choices and competition, which consumers don’t like. But they may also allow banks to run more efficiently, which is ultimately desirable.

As far as consumers are concerned, however, it is notable that the rollback does not touch the Consumer Financial Protection Bureau, a watchdog agency created by the Dodd-Frank bill after the crisis.

UM News: Why do the proponents of the rollback insist that it would help community banks? Did the regulation penalize small banks?

Bernile: Dodd-Frank does impose restrictions on banking entities based on their size. For example, under Dodd-Frank, banks with more than $50 billion in assets are subject to the toughest and most costly federal regulations, including yearly stress tests.

Among other things, the rollback of Dodd-Frank raises the threshold to $250 billion in assets. So, for example, an entity like American Express could avoid the extra regulatory scrutiny.

The rollback also exempts banks with less than $10 billion in assets from the “Volcker rule,” which limits banks’ ability to make risky bets, and exempts small banks from reporting detailed data on borrowers (as required by Dodd-Frank).

UM News: If there are record banking profits on Wall Street, why is there a need to deregulate?

Bernile: In answering this question, I will simply note that this seems to be the typical growth-and-regulation cycle. During periods of expansion, regulation tends to become more lax, whereas the opposite happens in response to severe contractions. Several factors contribute to these political cycles and I’m afraid that this is a conversation for another time.


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