Complying with regulations is part of the cost of doing business. For bigger businesses that can absorb those costs (or rather, pass them on to the consumer), it means armies of compliance officers and hefty fees. But for smaller businesses, like community banks, the costs can be so great that it means ceasing operation.
Typically, this scenario works to the larger institutions’ advantage, as they are better placed to handle regulatory compliance costs than are their smaller competitors. But large financial institutions are also subject to certain regulations to which smaller banks are not. The Wall Street Journal cites a new study that estimates the cost to these larger banks of complying with these regulations at roughly $70 billion.
Some of these costs are fair, such as, for example, premiums charged by the Federal Deposit Insurance Corp for insuring deposits. Others seem less fair, such as the $2.06 billion lost to interchange fee restrictions—which incidentally, have led to more and more banks to stop offering free checking in order to compensate for this loss of income.
Perhaps most troubling is the study’s prediction “that pre-tax earnings would drop by between $22 billion and $34 billion at these eight banks each year due to regulations tied to the Dodd-Frank act.”
Who will be affected by that potential drop in earnings? Nearly everyone, in some form or another. Some of those banks’ biggest investors are pension funds that invest on the behalf of civil service employees, teachers, and blue collar workers who count on their defined benefit pension plans to fund their retirement.
The unintended consequences of Dodd-Frank are far reaching, and they affect everyone. Not just Wall Street and not just “the 1 percent”.
Regulators would do well to take into consideration not just the seen, but the unseen when determining new financial regulations.