An article by Rob Nichols, president and CEO of the American Bankers Association, just appeared, titled “Why are small banks disappearing?” He reports most community banks throughout the nation no longer exist, the result of regulatory burdens imposed on the banking industry following implementation of the Dodd-Frank Act in 2010. He then explains that unless major changes are made to eliminate the duplicative and often contradictory rules by which banking must abide, the only banks to survive will be a small number of mammoth institutions. He concludes with a warning “the banking sector will continue to shrink and become less diverse,” and that “all Americans will pay the price in terms of lost opportunities.”

Mr. Nichol’s comments jogged my memory. For your interest I’ve reproduced an article I wrote nearly seven years ago when Dodd-Frank became law. You may draw your own conclusions.

                WELCOME TO THE NEW ORDER

On Wednesday, July 21, 2010, President Barack Obama signed into law what is commonly titled the Dodd-Frank Wall Street Reform and Consumer Protection Act. This legislation, consisting of 2,319 pages, and designed to address the abuses plaguing the nation’s economy over the past several years, is the most radical overhaul of the U. S. financial sector since enactment of the Glass-Steagall Act of 1933 which, among other things, established the Federal Deposit Insurance Corporation (FDIC). Although I didn’t scrutinize each provision of Dodd-Frank, I did scan the entire text and read numerous reviews. I admit much of what is buried in the text is a mystery to me, but I’ll wager I understand it as well as most of the legislators who voted for or against it. For your enlightenment, I’ve summarized below some of the more notable provisions.

1) A most prominent feature of the law is the creation of the Bureau of Consumer Financial Protection, to be housed in the Federal Reserve, but operate independently from it. Its sole function will be as its title claims: act as a watchdog agency for consumer protection, with authority to write and enforce rules on all types of consumer products including, but not limited to, mortgages, credit cards and payday loans. In addition, it will exercise consumer protection powers over banks and credit unions with assets no greater than $10 billion.

2) A second group to be created is a ten-member council of regulators, headed by the Secretary of Treasury, with broad powers to monitor threats to the financial system. Its authority will extend to the review of banks, insurers, and credit unions, determining which shall survive and which shall not. If the regulators decide a company poses a threat to the system, they can dismantle it and dispose of its pieces. This council also possesses the authority to overturn new rules enacted by the Bureau of Consumer Financial Protection previously mentioned.

3) The authority of the Federal Reserve is expanded to include oversight of large companies whose possible failure is monitored by the council of regulators. At the same time the Federal Reserve will undergo increased scrutiny by the General Accountability Office (GAO), the investigative office of Congress. In general, the aim is to more intimately tie together all the branches of government in its oversight of the nation’s financial operation.

4) In an attempt to make the financial sector less risky for investors, mandates are included that ban proprietary trading by banks and limit their stake in hedge funds and private equity firms. This provision, referred to as the Volker Rule, is named after former Federal Reserve Chairman Paul Volker who worked diligently to limit excessive risk on Wall Street. In his arguments, he stressed the importance of restricting banks from making certain kinds of speculative investments if they are not in behalf of their customers, pointing out the havoc experienced during the past decade was the direct result of excessive speculation by banks.

5) The world of derivatives is not ignored in this bill. A wide-ranging set of restrictions are placed on this $600 billion market in an effort to make these complicated financial products more transparent. One of the more controversial edicts, sponsored by Sen. Blanche Lincoln (D-Ark), restricts derivatives trading by requiring bank holding companies spin off the riskier derivatives into separate affiliates receiving no federal taxpayer assistance. However, numerous exceptions are allowed, particularly those related to markets in interest rates, foreign exchanges, gold, silver and certain forms of credit default instruments. In addition, these restrictions only become effective on new derivatives contracts after a two-year phase-in period.

6) If one ruling escapes criticism, it is the permanent extension of the $250,000 FDIC deposit insurance coverage on accounts, previously scheduled to revert to $100,000 in 2014.

7) From this point on matters become considerably murkier. Various provisions provide for fragmented authority, with state and federal agencies sharing somewhat diffuse responsibilities. Economic uncertainty will be inevitable as bank and securities regulators begin to write and adopt the 243 rules ordered by the legislation, with some of these rules requiring years to implement. There are, of course, a myriad of other sinkholes masquerading as reform, most of them as convoluted as they are arcane. For those of you with curiosity, you’re invited to immerse yourself in the maze, though I warn you it’s not easy reading.

Now that you’re exposed to the highlights of Dodd-Frank, you’re entitled to my evaluation of what has become the law of the land. I admit up front: Reform of the nation’s financial labyrinth is long overdue. I also acknowledge the federal government bears a principal responsibility to ensure the banking and investment sector adheres to rules which do not jeopardize our economic well-being. The reason for this is fundamental; without effective oversight, our financial institutions will systematically loot the American public of all its assets. Bankers will gouge their borrowers and their depositors; there’s no upper limit to the interest rates they’ll charge nor to the lower limits they’ll pay. Similarly, mutual funds will skim from their investors’ portfolios and there is no limit to the depth they will dip. Not to be outdone, insurers will continuously boost premiums while reducing payouts; again, there is no limit. This is all the result of simple human nature. Only the federal government, with its enforcement authority, possesses the regulatory wherewithal to prevent systematic pillage of our citizens.

With this said, I nonetheless find little of value to recommend Dodd-Frank. Despite the mass of committees it forms, regulations it establishes, and procedures it embraces, its practical effect will be little more than intimidation of the industries it is meant to regulate, forcing them to render lip service to the rules while conducting business as usual as they continue to rip off the public. It’s my belief the sheer magnitude of the measure’s scope will prevent effective application of its stated goals, however well-meaning. Only through enactment of a manageable set of simple and well-defined rules with clear enforcement provisions, overseen by a limited number of experienced regulators, each possessing clear authority, can our government reign in the abuses endemic to the financial system. As intricacy of oversight increases, its effectiveness will decrease. Dodd-Frank is so complex, its regulatory effects will be nil.

I’ll conclude with a final thought. Although Dodd-Frank will not perform its professed function, it will certainly affect the industries it’s meant to regulate as well as the general public. In complying with the many rules to be established, I envision the following results: fees to pay, applications to submit, waivers to obtain, fees to pay, regulatory boards to petition, licenses to be issued, fees to pay, forms to file, circuitous procedures to navigate, and, most assuredly, fees to pay.