Dodd-Frank Still Harmful After a Decade, But Modest Deregulation Has Helped

In the decade since President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010, this supposed “financial reform” has caused harmful and sometimes disastrous effects for consumers, investors, entrepreneurs, and Main Street financial institutions such as community banks and credit unions. According to the Mercatus Center at George Mason University, by 2014 the law had produced more than 19,000 pages of new regulations that had a particularly harsh impact smaller financial institutions. The ray of sunshine in these clouds is that, in recent years, there have been bipartisan efforts to provide regulatory relief from some of Dodd-Frank’s biggest burdens, as well financial regulatory agencies creating more flexible rules within the law.

One of the costliest and most regressive provisions of Dodd-Frank has been the Durbin Amendment, named after its sponsor Sen. Dick Durbin (D-IL), then-Senate Majority Whip. The measure slapped price controls on the fees that banks and credit unions charge retailers to process debit card purchases. These price controls would not let banks and credit unions even recover most costs. As a result, these costs were passed on to consumers, in the form of reduced benefits, like free checking, and higher fees at their banks and credit unions.

This cost-shifting resulted in some of the poorest consumers dropping out of the banking system. In fact, a 2014 George Mason University study calculated that the Durbin Amendment contributed to 1 million Americans losing access to the banking system—becoming “unbanked”—by 2011. A new report from the Electronic Payments Coalition (EPC), which represents banks and credit unions of all sizes that issue payment cards, finds that the Durbin Amendment has cost issuers more than $90 billion in lost revenue. The EPC report, noting a study from the Federal Reserve Bank of Richmond that found little of retailers’ savings are passed on to consumers, concludes that the lost revenue “could have expanded services to the unbanked and underbanked such as free checking accounts that help lift individuals up and provide a layer of financial security.”

Because of the powerful lobby of big retailers who benefit from having these costs shifted to consumers, legislative. But if there is any good news, it is that, despite a renewed push since the pandemic by restaurants and other retailers to extend these price controls to credit card processing fees, both houses of Congress so far seem reluctant to repeat and extend this policy mistake.

CEI helped draft a coalition letter, signed in April by several leaders of free-market policy groups, warning that “extending this policy error to credit cards, particularly during this time of economic fragility, would cause further devastation.” We will continue to be vigilant in advising lawmakers not to extend this policy error in the next round of “stimulus.”

Recognizing Dodd-Frank’s ill effects on those who had nothing to do with the mortgage meltdown in 2008, Congress also passed into law two efforts at modest but significant regulatory relief from the law. The Jumpstart Our Business Startups (JOBS) Act, signed by President Obama in 2012, exempted small and emerging growth public companies for five years from some of the most onerous restrictions from both Dodd-Frank and the ill-conceived Sarbanes-Oxley Act, which was signed by President George W. Bush in 2002. The JOBS Act also made it easier to for small companies raise funds through crowdfunding or mini-initial public offerings without going through the red tape from Dodd-Frank and other laws intended to target larger companies.

Then in 2018, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which had the support of a significant number of Democrats. This law provided exemptions for smaller banks from provisions such as the Volcker Rule, which the law’s supporters claimed would not impact smaller banks in the first place. After initial fumbling, in which the Federal Reserve and other regulatory agencies did not grant the extent of relief to regional banks that the law required, the agencies did offer more regulatory relief after rightly seeing that the Volcker Rule was constraining the economy during the pandemic.

Deregulatory progress is good, but regulatory agencies and Congress must do much more to liberate Main Street from the plethora of Dodd-Frank’s NeverNeeded rules. They should also do what “financial reform” should have done 10 years ago to prevent future crises—end the special privileges of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Looser standards from the GSEs for everything from down payments to credits scores, encouraged by politicians such as Dodd-Frank cosponsor Barney Frank (D-MA) in the 1990s and 2000s, played a significant role in fomenting the crisis, but Dodd-Frank barely touched these entities. Fortunately, Federal Housing Finance Agency director Mark Calabria has now proposed a regulatory capital framework that will help level the playing field between the GSEs and private financial institutions.

As CEI founder and chairman emeritus Fred Smith has said, when looking at policy, it’s good to be a “despairing optimist.”