The countdown has begun as we approach the one year mark anniversary of the passage of Dodd-Frank when provisions begin kicking in and a number of which funnel into a vacuum. The 2,300 pages will require over 240 separate implementing legislations, the creation of several new federal organizations, the merger of others, and rules over a dozen areas of financial services. Its intent is to prevent a shadow banking system to exist and to provide an orderly transition if a systemic crash is threatened. We laud these aims as we all remember vividly the “crash”. As much as Dodd-Frank is talked about no one person or agency really understands all of it, nor is there a definitive study on its effects and how to make it better. Further clouding the banking landscape is other legislation and rules passed that simultaneously impact, in some cases more directly, such as the FATCA legislation, the IRS ruling which will require reporting on accounts of NRAs, Basel 3 among others. Hampered by deficits the government has attacked the banking system to deputize them to collect taxes world wide, a costly role and one for which they are ill suited.
Where does this all leave us? With uncertainty, concern, and reactionary over-regulation. We do know that the derivatives provisions, over 100 of them, that were scheduled for July 16 have been put off for six months as you could not have trading over an exchange that did not exist with rules that were not written. The law requires that certain risk be rated but the new rating agencies that are to perform this task also do not exist. We know that interest will soon be paid on checking accounts for businesses and that banks will receive a lesser few on credits cards. This will lower earnings that will have to be made up somewhere and will probably lead to credit card cancelations for marginal credit risks.
We know that significant new and more complex documentation will be required for consumer protection, again costly for financial institutions. We know that the regulators are vigorously enforcing stronger credit standards making it much more difficult to refinance a mortgage and freezing out lower income applicants by requiring large down payments. The latter surely has an effect on the housing and real estate markets. It is more cost effective for a bank to foreclose than to restructure. Small businesses are having their loans called and their credit card debit limits lowered with little alternative credit available. Thus the creators of 70% of new jobs are holding fast and slowing job creation. We see money flowing out of the US in torrents as foreign investors no longer consider the US a safe haven and foreign banks are leaving the US almost daily. Isn’t any one looking at the big picture?
In spite of this, we are adjusting to the new normal. We just have to understand the rules when someone knows them well enough to explain them. Banks are lending and seeking new clients. The system is stronger and better capitalized. Governments are cooperating. We are learning from our mistakes. And the government will find a way to stimulate the economy in an election year. But it will be a bumpy road in getting there and job creation will be slow. So will the housing market with such tight credit standards. And Dodd-Frank will dominate the banking news for better or for worse.