The Dodd–Frank Wall Street Reform and Consumer Protection Act, 2010 (‘Dodd–Frank’) is a United States Federal Law that was intended to reduce levels of systemic risk in the banking sector, such that we would never again see highly leveraged balance sheet positions causing the failure of banks, and those failures causing contagion in other institutions and whole economies (as happened in 2008).
Unfortunately, Dodd-Frank became an unintended assault on business because the capital adequacy provisions in the Act caused banks to stop lending (as loans weakened the strength of balance sheets). Loans were called in or withheld; overdrafts, materials financing and factoring agreements were not renewed; and, as a result, rates of business failures exploded. In some regions, banks refusing to fund the growth (i.e. not the decline) of small and medium sized enterprises has become the biggest single cause of business failure. The Act and much of the other related regulation since the financial crash also caused banks to divert most of their discretionary project budgets towards regulatory compliance initiatives – including meeting the needs of more demanding regulatory reporting.
Regardless of your personal and professional view on the value of increased regulatory reporting (Is anyone doing anything with the data? What difference has it made? Has systemic risk actually reduced?), diverting funding away from projects that could improve products and services to customers should be a concern for everyone. It is in no-one’s interests for our banks to become moribund.
Another highly ironic unintended consequence of the whole explosion in regulation in recent years (Dodd-Frank, Basel X, EMIR, MiFid etc) has been that it punishes small banks and financial institutions more than the big guys. Ie the institutions that represent the biggest source of systemic risk (big banks) are impacted less negatively than those that present almost no systemic risk. This is because the smaller institutions lack the resources (people, money, skills) to do the wholesale legacy system upgrades, system rationalisations, and new systems developments needed to meet regulatory reporting and risk management requirements.
Review and reform of Dodd Frank is very much required, otherwise our western banking system, business environments and economies will be stuck in a nose dive that could become a death spiral.
We should welcome a review of Dodd Frank and the Volcker Rule (the rule within the Act intended to stop speculative trading and investments by banks), and all other recent financial regulation. We will not see proprietary trading in banks returning to the extent that it puts the whole institution at risk (when it does come back – and it will come back – there will be severe ring-fencing of assets at risk) but we should all want to see our businesses better financed with a wide range of financial products.
NB this article was first published on 6 Feb 2017 in Financial IT https://financialit.net/blog/dodd-frank-unintended-assault-business