The Implications of Dodd-Frank

"Now, some of the regulations we see today, in my view, are perhaps even more inefficient than ones we've seen in previous years. There's Dodd-Frank in the financial sector, which is unique piece of legislation. It doesn't provide rules directed at individual's [or] organizations, which is the intent of the legislation. Rather it is a directive for bureaucrats to create more bureaucracies without particularly specific limits. Take, for example, the Consumer Protection Bureau, within Dodd-Frank. The Consumer Protection Bureau gives regulators the right to punish financial firms who engage in "abusive practices." But my understanding is that abusive practice has no legal definition. Which means the term 'abusive' is whatever regulators want it to mean. Consumer Protection Bureau also gives which financial products can be offered and to whom, and at what price.

Now you might think that Dodd-Frank only pertains to financial issues. That's certainly what I thought when I read about Dodd-Frank. But Dodd-Frank also has a provision that requires manufacturers who use minerals from in and around the Congo to provide SEC (Securities and Exchange Commission) regulators with information on the acquisition of these minerals and in fact on their entire supply chain. The U.S. Chamber of Commerce estimates that this will affect over 100,000 businesses, and the National Association of Manufacturers estimates compliance will cost $9 billion to $16 billion.

Now, certainly no one knew what Dodd-Frank would be when it was passed. Three years after it was passed, we still didn't know what Dodd-Frank would be because more than half of Dodd-Frank remained unwritten. Today after nearly 5 years there's still more to know about Dodd-Frank that remains unfinished. What impact is Dodd-Frank having? I'm going to cite two studies, one done by survey data from the New York Fed that's showing a significant impact on small businesses. This includes lending restrictions, less competition among lenders and a decline in the number of community banks which are banks with less than $10 billion in assets--and these are the banks that disproportionately lend to small business. Another recent study found that the decline in community banking accelerated considerably in the last few years, reflecting economies of scale in managing new regulation associated with Dodd-Frank. Small Business Administration says that lending to small businesses has declined by about 20% since 2008, which was of course the year of the Great Recession. And in 2013 only 1 new bank entered the banking industry.

So you look at the outcome of Dodd-Frank--declining competition, fewer banks, lack of entry, higher costs, regulators with broad mandates who make vague and far-reaching rules--this represents a sharp departure from the clear and specific limits on government."

L. Ohanian