It's been described as the biggest overhaul of Wall Street since the Great Depression. Approved by President Obama on July 21, the Dodd-Frank financial regulatory reform bill is an attempt to reallocate the power from Wall Street to Washington and prevent future financial crisis. The bill is expected to dramatically impact all banks – large and small – and the mere mention of Dodd-Frank is sending shockwaves through the banking industry.
At first blush, the biggest burden seems to be on community banks because of new rules and regulations that will raise compliance costs such as training, staffing, processing documentation and disclosures for consumers, as well as external examination. Community banks have stated that the bill will hinder their competitive ability to lend.
If this is true, then where will most small businesses get the loans to fund their operations and growth plans? If small business is the foundation of our economy and community banks are the cornerstones to needed loans, one could formulate that fewer small business loans will be made and result in slower future economic growth.
Larger banks have greater resources for building the processes and procedures to deal with the bill's requirements. Community banks will need to get creative by outsourcing or creating cooperative efforts to share or limit costs, or they will need to re-examine their fees, rates, and business model in order to effectively compete. Ultimately, there may be fewer community banks.
Even though it is 5,000 pages, the bill is still vague enough and gives regulators broad discretion on writing and interpreting rules. How much input will the banking industry have with regulators during this process? How will they navigate the future? Unfortunately, the bill does not guarantee avoidance of another financial crisis.
Despite pages of new regulations, this bill hides the real problem – how we got here in the first place. Both the banking and accounting industries have advocated financial literacy. Instead of focusing on more stringent regulation, it would seem more beneficial to educate the consumer to better understand the products, services and risks. Despite the increased disclosures and documentation provided, consumers still need to know for what they are signing up.