Dodd-Frank’s Thousands of Commandments and Near-Zero Benefits

Among the Ten Thousand Commandments in Wayne Crews’s annual survey of the federal regulatory state, are thousands of federal financial rules added by the Dodd-Frank Wall Street Reform and Consumer Protection Act – whose unfinished implementation has already cost the economy billions, perhaps close to a trillion dollars. (In Crews’ related study “Tip of the Costberg,” he calculates from official government figures that compliance and indirect costs of financial regulation total $79.125 billion annually. But he cites estimates that some of the law’s provisions could have a cost to the economy exceeding $1 trillion.)

This is similar to the American Action Forum study released last week, which found that Dodd-Frank, based on the economic effects of increasing the cost of lending, could result in the loss of  “$895 billion in reduced Gross Domestic Product (GDP) over the 2016-2025 period, or $3,346 per working age person.”

Even liberal Democrats in Congress have acknowledged that Dodd-Frank’s implementation has resulted in some unfortunate costs for consumers and small banks. In responding this week to Senate Banking Committee Chairman Richard Shelby’s (R-Ala.) unveiling of a bill that would provide regulatory relief from some of Dodd-Frank’s most costly provisions, Ranking Minority Member Sherrod Brown(D-OH) expressed opposition but at least acknowledged that smaller financial institutions were feeling Dodd-Frank’s pinch. “Democrats are ready, willing, and able to work with Republicans to get community banks and credit unions the regulatory relief they need right now,” said Brown in a statement quoted by American Banker.

But statist advocacy groups still argue that preventing the next financial crisis justifies any such cost. “Focusing on claimed costs of regulation to prevent another financial crash ignores the massive and very expensive costs of such crashes,” said Dennis Kelleher, the president and CEO of the inaptly named group Better Markets. He told the Wall Street Journal that his group’s study found a financial crisis would cost $12 trillion.

Not only does such an argument ignore the fact that massively reduced growth is itself a crisis, it assumes that Dodd-Frank will actually prevent a meltdown. No evidence exists that the law, rammed through a Democrat-controlled House and Senate in 2010, will prevent a crisis, and much evidence exists it could bring on a new one by creating a permanent bailout structure through federal financial agencies.

As Mercatus Center senior research fellow Hester Peirce testified Wednesday before the House Financial Services Oversight and Investigation Subcommittee, “Dodd-Frank, despite language to the contrary, keeps the door open for future bailouts” She added that the law “includes many provisions that are not related to financial stability, but fails to deal with key problems made evident by the crisis.”

For instance, the Financial Stability Oversight Council (FSOC) has the power to designate financial firms as “systemically important financial institutions” that will not go through the normal bankruptcy or receivership process if they fail. As my colleague Iain Murray recently wrote in a cover story for the Washington Examiner, “SIFI status is clearly valuable, and is therefore a reward to big banks.”

Yet many midsize banks and stable insurance companies don’t want this “too big to fail” status, or the extra red tape, since they had nothing to do with the crisis. MetLife is suing the FSOC over its SIFI designation. And regional banks that are above the $50 billion asset threshold for SIFI status but are clearly not Wall Street size – KeyBank and Fifth Third Bank in Brown’s state of Ohio come to mind – object to this automatic designation as “systemic.” Sen. Shelby’s bill attempts to fix this by raising the threshold to $500 billion.

Then there are what Peirce referred to as Dodd-Frank’s “many provisions that are not related to financial stability,” which impose significant costs on consumers, investors, and entrepreneurs.

Take the Durbin Amendment. Inserted into the legislation on behalf of then Senate Majority Whip Dick Durbin (D-Ill.), it put below-cost price controls on the fees that banks and credit unions charge retailers to process debit cards on behalf of consumers. In his Senate floor speech introducing this measure, Durbin admitted he was lobbied heavily for the price controls by retail gian Walgreens, which is headquartered in Durbin’s state of Illinois.

Big retailers like Walgreens reaped a $6 billion windfall, but consumers were soaked as debit card costs were shifted to them make up for the loss. As a direct result of the costs of the Durbin Amendment, banks and credit unions eliminated free checking for many consumers with low-balance checking accounts.

As I have written previously, in 2009, 76 percent of banks offered free checking accounts with no minimum balance, according to the annual survey by That number dwindled to 45 percent in 2011 and 39 percent in 2012. Bankrate fingered the Durbin price controls as a big factor, pointing to “new rules capping the cost of debit card swipe fees for U.S. retailers.”

On top of that are the Dodd-Frank provisions not even remotely related to the financial system, which were added on to this “must-pass” legislation. These mandate that publicly-traded companies trace their supply chain and disclose the use of any “conflict minerals” from the Democratic Republic of Congo, and that publicly-traded energy firms disclose any payments they make to foreign government officials. Both misguided provisions are subject to court challenges for being “compelled speech” in violation of the First Amendment.

Not only have such provisions imposed significant costs to American consumers and investors – and in the case of the conflict minerals provision, imposed devastating costs to the people of the Congo the provision was intended to help, as documented by the Washington Post – they have diverted the resources of the Securities and Exchange Commission away from its core mission of fighting securities fraud. As Peirce noted in her testimony, they have both “consumed considerable SEC resources.”

Peirce concluded her testimony by pointing out that Dodd-Frank didn’t even attempt to address the institutions at the core of the financial crisis: the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. “Congress missed an opportunity to address the government’s role in housing finance, and the government continues to crowd out the private market in this space,” she said.

In fact, while the government is imposing bank-centric capital standards on insurance companies like MetLife (which even Sen. Sherrod Brown has said makes no sense), its conservatorship of the GSEs is leaving them with minimal capital reserves, as all profits are immediately seized by the Treasury Department for general government spending. As a result, a government audit recently found that the GSEs now face the heightened risk of another taxpayer bailout.

As citizens and taxpayers, we need to demand that our public servants in Congress repeal Dodd-Frank and many other of the Ten Thousand Commandments – and rein in the government subsidies and regulations that were the real cause of the crisis.