The Dodd-Frank Wall Street Reform and Consumer Protection Act represents the most sweeping change in the regulation of the U.S. financial industry in over half a century. Contained with the act are 243 new rules that will be developed by 11 different government agencies1; fundamentally reshaping how business is done at financial and non-financial institutions. But do these regulations treat businesses fairly and equitably or do they establish an unfair environment that favors a select few?
StrategyDriven believes the answer to this question is the latter. Not only does the Dodd-Frank Act create an unfair advantage for some businesses, the advantages provided favor those companies responsible for the meltdown of the U.S. financial system.
The financial reform act directs absolute rather than scaled coverage in its implementation. Subsequently, small institutions will be subjected to the same regulatory rules as larger ones and those ‘too big to fail’ institutions responsible for our financial marketplace challenges. While the various audits and forms will inevitably have fewer $000s, the cost to perform these reviews and compile and submit these documents will be roughly the same. For small financial institutions, the high cost of compliance will be passed on to a relatively smaller customer base causing a disproportionally high increase their customers’ fees which will in-turn drive these individuals to the ‘too big to fail’ institutions… the very same institutions whose poor performance necessitated the legislation in the first place.
“Small banks, forced to use their limited resources to comply with burdensome new reporting requirements, will suffer, as will the communities they serve.” 2
United States Senator – Tennessee (R)
StrategyDriven Recommended Practices
StrategyDriven believes the Dodd-Frank Act unduly penalizes small financial institutions not responsible for the financial meltdown of 2008. The full scope of the marketplace imbalance created will take years to be understood as the final details of the many new regulations will not be defined anytime soon. Thus, company leaders must remain vigilant in order to mitigate, transfer, or eliminate the evolving financial industry risks and costs facing their organizations. In this specific case, StrategyDriven suggests company leaders consider the following:
- Follow the FDIC’s rule making process and understand how these new regulations are impacting financial institution partners; focusing on the changing costs of doing business with these organizations particularly if they are relatively small.
- Consider whether the relatively higher cost associated with doing business with smaller banks is warranted given other beneficial factors such as community good will.
- Provide financial advisory programs to employees; ensuring they are apprised of the costs and benefits of maintaining a relationship with both small and large financial institutions.
As always, we’ll provide our thoughts on how business leaders can best prepare for the implementation of the financial reform law and weather the storm in the long-term. We also hope you’ll share your thoughts, lessons learned, and recommended resources with us and the StrategyDriven audience.
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- “Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Enacted into Law on July 21, 2010,” Davis Polk & Wardwell LLP, July 21, 2010 (http://www.davispolk.com/files/Publication/efb94428-9911-4472-b5dd-006e9c6185bb/Presentation/PublicationAttachment/efd835f6-2014-4a48-832d-00aa2a4e3fdd/070910_Financial_Reform_Summary.pdf)
- “Financial overhaul places regulatory burden on community banks,” Cumberland Business Journal, August 2, 2010 (http://ucbjournal.com/news.php?id=95)