Dodd Frank: A Review and Analysis from the Perspective of Small Financial Institutions - Essay Example

Section/# Dodd Frank: A Review and Analysis from the Perspective of Small Financial s With so many government programs originally intended to provide an answer to prior shortcomings that have been found in key structural areas of the economy, the Dodd Frank Act of 2010 had a series of profound impacts upon the way in which banks and financial institutions integrate with business. At face value and according to the politicians that so vigorously promoted the bill, it was intended and marketed as a means of reining the previously un-restrained financial greed that ultimately precipitated the financial collapse of 2007/2008. Yet, regardless of how well-intentioned the act might have been, the fact of the matter is that it ultimately served to integrate a great deal of harm with respect to the way in which smaller neighborhood/community banks could continue to remain viable and profitable under the terms that the Dodd Frank act specified. As a function of analyzing the different ways in which the Dodd Frank act has reduce the overall level of competitiveness and profitability/sustainability that small community banks can leverage within the current market, the following brief analysis will seek to elaborate on some of the most important aspects of the ways in which Dodd Frank has constrained and ultimately harmed the smaller banks. It is the hope of this author that by integrating an understanding of this particular topic, the reader can come to a fuller and more complete understanding of the way in which Dodd Frank has had profound impacts, both good and bad, upon the way in which the current financial markets within the United States operate. At face value, the Dodd Frank act was sold to the public as a means of taming what was referred to colloquially as “wall street titans”. However, the drawback of writing a bill that is specifically intended to do just that is the fact that the smaller banks, which defined many communities within the United States, have ultimately found it much more difficult to compete and abide by the recommendations and regulations that Dodd Frank automatically implies. This of course can be seen with regards to the scale of requirements, economic resources, time, and reporting standards that financial institutions are forced to comply (Petri 13). For instance, a large multinational bank or financial institution operating within the United States would need to devote some small percentage of overall personnel, time, and energy with relation to making sure that all aspects and regulations of Dodd Frank are in compliance. Conversely, with regards to a smaller community bank, it does not take a great deal of imagination to understand how and why they disproportionately larger number of man-hours and money would be necessitated in order to meet you same standards. Conversely, due to the broad overarching framework that defines Dodd Frank, the reader can understand that by very definition all banks fall under the rules and regulations that it applies. This is somewhat unfortunate due to fact that small community banks are by very definition not able to impact to such a degree or have the profound inter-market effects that Dodd Frank was originally written to protect against. As a function of this, it can be readily understood that the smaller community banks are unfairly penalized and caught up within the strict reporting requirements the Dodd Frank engenders. This of course strikes the very nature of specifically what Dodd Frank was intended to prevent against. Originally drafted as a means of protecting the United States financial markets from the unintended impacts of needing to bail out so-called “too big to fail” financial firms, the ancillary effect of all of the regulations the Dodd Frank contains serves to ensure that almost all financial institutions the United States will ultimately be large ones. By creating such a litany of rules and regulations, reporting guidelines, and compliance metrics, such an action nearly guarantees that the smaller community banks will not be able to abide by all of these guidelines and must necessarily either shutter or sell themselves to larger financial institutions. Of course, it is not the understanding of this particular author that Dodd Frank was written on purpose to destroy the fabric of small community banking institutions throughout the United States. Rather, the fact of the matter is that Dodd Frank, like any legislation, found it necessary to speak to the least common denominator among financial institutions as a means of drafting and writing this particular piece of legislation. Accordingly, the weaknesses that the global financial collapse of 2007/2008 engendered, was the sole determinant and inspiration for seeking to draft legislation that would prevent such incident from occurring in the future. Yet, the most unfortunate reality is that due to the overall level and size that many of these small community banks engender, they are oftentimes not able to comply with the requirements the Dodd Frank sets forth; and even if they do, it would require such a disproportionate amount of time and manpower to facilitate that it would ultimately make them unable to compete and/or survive within the markets that they had previously thrived (Simmons 9). The reader should understand that even though many aspects of banking remain uniform between large and small financial institutions, the role that the local community bank plays is ultimately far different than the role in which large multinational financial institutions, such as the ones that were targeted by Dodd Frank, integrate with. For instance, one of the main determinants that lead the global financial collapse of 2007/2008 was the degree to which these large financial institutions were willing and able to enter into complex debt – financing activities; such as mortgage-backed securities. Conversely, the average local community bank operates by much more simple model in which debt is only created via the much more stable and risk-averse means of leveraging deposit funding in order to cover liabilities. However, due to the fact the Dodd Frank lumps all banks in together as one, this nuance is completely and entirely ignored. One final aspect of Dodd Frank that harms local community banks is the level to which the consumer will be willing and able to fund these smaller banks compliance with such regulations. Whereas the larger financial institutions have entire teams of lawyers, accountants, and government compliance specialists to help them deal with the layers of red tape that current financial regulation entail, these are obviously not evidenced within the local community bank (Hampton 10). As a function of this, in order to hire experts who can guide them through this delicate process, the local/community bank will find it necessary to raise fees upon its stakeholders. Naturally, even if the bank is able to survive through doing this, it reduces the level of competitiveness that it can exhibit within the given market. In summary, the following listing details some of the most distinct advantages and disadvantages that Dodd-Frank has had upon small banking institutions within the United States: Advantages: Creates a level playing field for all banks within the system Uniformly allows for a rigid set of rules by which financial markets; regardless of size must abide by Allows for a further level of government oversight as a means of helping to prevent the disaster of 2007/2008 in the future. Disadvantages: Community banks do not have institutional structures or analytical resources to undertake such due diligence It puts smaller banks at a distinct disadvantage in the market due to the reporting requirements and the need to pass these fees on to their end consumers; thereby making them a less attractive option for the consumer Before Dodd-Frank, community/smaller banks were not subjected to the same funding costs as larger financial institutions; this “break” has subsequently been dropped with the introduction of Dodd-Frank The need to integrate with a vastly increased level of reporting and oversight; whereas the big bank can easily afford this, the small bank must necessarily stop other work processes, and perhaps even hire more individuals, to ensure that these requirements are met. Creates a situation in which federal regulators are unwilling to create new bank charters; thereby making entry into the market more complex and difficult Although the preceding analysis cannot and should not be meant to define all the ways in which Dodd Frank harms the local/community Bank, it has helped present the reader with some of the more salient means by which the local/community bank is being harmed by the new regulations that Dodd Frank necessarily entails. Ultimately, the weakness of Dodd Frank can be understood due to the fact that it was not willing or able to consider the key differentials that exist between large and very small financial organizations within the United States. As a function of attempting to safeguard the United States economy from another situation precipitated by “too big to fail” financial institutions, Dodd Frank is ultimately created a situation in which these “too big to fail” financial institutions may very well be the only financial restrictions existent within the system if the smaller financial institutions are forced out as a result of the headaches and financial drain that Dodd Frank has imposed upon them. Works Cited Hampton, George. "Blog V. Blog: Small Banks In The Dodd-Frank Crossfire." Pratt's Bank Law & Regulatory Report 17.11 (2011): 10-11. Business Source Premier. Web. 20 Apr. 2013. Petri, Robert. "Community Banks And Credit Unions." GAO Reports (2012): 1-83. Business Source Premier. Web. 20 Apr. 2013. Simmons, Rachel. "Does The Dodd-Frank Act Aid Small Banks?." American Banker 177.F334 (2012): 9. Business Source Premier. Web. 20 Apr. 2013. Read More