By Michael MorrisThe 2016 election stirred a pot of speculation, with countless pundits wondering what a Trump administration might mean for regulation of the financial industry. A main point of concern was the future of the Dodd-Frank Act, a law whose likely modification will have significant repercussions for bankers.
The Republican Congress’s opening salvo has taken the form of the Financial Choice Act, which would lift regulatory burdens from institutions—as long as they are willing to seriously expand their financial reserves in case of emergency.
Regardless of the Choice Act’s future, the time for such an assessment of Dodd-Frank is long overdue. “It’s time to rethink major Wall Street regulations, including the Volcker Rule and the Federal Reserve’s annual stress tests of banks,” said New York Fed President William Dudley.
Updating crisis-era regulations
The Volcker Rule was part of a series of regulatory changes following the financial crisis—including the Financial Stability Oversight Council for determining systemically important financial institutions, as well as the Consumer Financial Protection Bureau. All of these regulations were intended to protect the stability of the financial system and consumers.
Despite good intentions, these laws had a negative impact on those banks where the risk was small to none. Most banking executives, such as Martin Geitz of Simsbury Bank, would agree that regulations and oversight are necessary, but not at today’s level of constraint and complexity. “Community banks have a very simple business model,” he says. “So we should have different and simpler regulatory oversight” than a larger bank.
This revision has been a long time coming. “The industry has been saying this since 2011, but the political climate has not been conducive to change,” says Lindsey Pinkham, president and CEO of the Connecticut Bankers Association.
A few necessary changes
Indeed, several such changes should be made—and as soon as possible. The Volcker Rule should be repealed, and the differences between speculative and market-making activity should be clearly defined. FSOC rulemaking, as well as certain aspects of the regulations between large and small banks, should also be repealed. Finally, the CFPB’s authority, rulemaking and accountability should be revamped to mitigate risks to consumers while providing sustainable growth for the U.S. economy.
Of course, Congress has other priorities in its queue—replacing the Affordable Care Act and focusing on general tax reform may prevent Dodd-Frank’s overhaul in 2017, not to mention resistance to the proposed Financial Choice Act. But with the exits of various agency heads who championed these rules, the regulatory burden may lessen over the next year as regulators revise the rules’ interpretation and enforcement.
I expect that such gradual changes—in lieu of the immediate, wholesale repeal of Dodd-Frank—will not negatively affect banks’ efforts toward ensuring quality and compliance. That’s crucial because an effective quality control function improves productivity through better loan processing, leading to faster closing turn times, quicker funding of loans, decreased loan delivery suspensions, and a decline in requests for loan repurchases and indemnifications.
The coming regulatory future
For now, banks should stay the course, investing in technology that enhances their quality control programs. Technology can provide a cost-effective way to automate the process and help audit, identify, track and correct loan defects across the pipeline.
Banks can also enhance their competitive advantage by selling defect-free loans at a lower cost, keeping customers and investors happy for sustainable growth.
What can banks expect in the short term? Over the next four to six months, I would expect to see federal regulations tailored to the unique conditions of smaller community banks. Similarly, the Volcker Rule may be simplified for the purpose of distinguishing a speculative investment from a market-making investment.
These changes—and further reforms of crisis-era regulations—will give rise to an economy that has clear guidelines and reasonable oversight in place to protect systemic robustness while allowing strong growth. That’s an environment that will allow banks, large or small, to thrive.
Michael Morris, a management consultant with more than 20 years of experience in the financial sector, is the founder of TMG. Opinions presented are those solely of the author.