Dodd-Frank: A Not-So-Happy Birthday

On most occasions, an anniversary or birthday is cause for celebration. Unfortunately for the American people, the anniversary of the Dodd-Frank Act is no joyous occasion. On July 21, 2010, Americans were given 2,300 pages of labyrinthine legislation intended to oversee a safer, more stable financial system. It was meant to curb the supposed excesses of capitalism, rein in an unruly banking sector, lessen the risk of systemic banking failure, and end the idea of “too big to fail.” After five years, has the Dodd-Frank Act lived up to its promise? Hardly.

Perhaps one of the most damaging outcomes of massive, sweeping regulation like Dodd-Frank is the unintended consequences, or what economists call distortionary impacts, on an industry or the economy. Admittedly, it is often quite difficult to quantify or measure a “distortion” when discussing a regulation or government intrusion, but the damage done by Dodd-Frank is glaring. For example, the Federal Reserve Bank of Richmond found that the United States averaged approximately 100 new bank charters per year from 1990 to 2008, just before the financial crisis. Since 2010? The United States has averaged three per year, or to put it another way, the banking sector has seen a 97% collapse in new bank formations. This means fewer choices for consumers and an increasing concentration of assets in the nation’s largest banks. But supposedly Dodd-Frank was meant to protect Americans from too much risk assumed by the big banks. Put simply, this is a huge blow to the competitive lifeblood of the financial sector.

Dodd-Frank was supposed to minimize the likelihood of a “systemic failure” by putting an end to “too-big-to-fail.” Too-big-to-fail institutions are seen as so large and so interconnected to the rest of the economy that they must not be allowed to close their doors. Dodd-Frank has not performed well in this regard, either. According to the Mercatus Center at George Mason University, the number of small banks in the United States – that is, banks with fewer than $10 billion in assets – has dropped by over 14 percent, while the number of large banks has increased by over six percent. In 2014, the five biggest firms controlled nearly $7 trillion in assets, up from approximately $5.5 trillion in 2010.This is due to many factors, but Dodd-Frank is certainly a large one. Regulation, if truly necessary, should not be anti-competitive or favor the big guys over the little guys. But that is exactly what Dodd-Frank has done. Lloyd Blankfein, CEO of Goldman Sachs, certainly seemed optimistic about the new law when he remarked, “We will be among the biggest beneficiaries of reform.”

The burden of regulation is almost always disproportionately borne by the least well-off, and the Dodd-Frank Act is no different. For example, in the year prior to its implementation, nearly 76% of checking accounts were eligible for free checking. By 2013, that number dropped to 38%. While that may not make a difference to many people, it does to families living paycheck-to-paycheck. Why did this happen? Many researchers point to the “Durbin Amendment” which limited the amount of money that banks could charge every time a card is swiped for payment. Predictably, the banks implemented charges in other areas to make up for the lost revenue. According to a University of Chicago study, the aggregate loss to consumers as a result of the Durbin Amendment will be between $22 and $25 billion.

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The Dodd-Frank Act may even be the biggest law in history and its cost to the American economy alone is nearly one trillion dollars over just ten years. After five years of evidence, perhaps it can be said that the Dodd-Frank Act was simply too-big-to-succeed.

Garrett Ballengee is a Senior Policy and Research Analyst at the Charles Koch Institute.

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