Editorial: Dodd-Frank could stand an overhaul

The Detroit News

Not every change coming out of the still-fresh Trump administration merits a doomsday response. One cause for optimism is the commitment to attacking regulations that are holding back the economy. The Dodd-Frank Act is first up.

Last week, President Donald Trump ordered a review of the 2010 act, an ambiguous tome of finance rules aimed at preventing another deep recession by more strictly dictating how banks allocate capital. The Democratic supporters of the bill can argue, rightly, that there has not been another economic downturn since the act was put in place. But there also hasn’t been the expected and needed economic surge.

Dodd-Frank bears some responsibility for the sluggish growth.

But with Dodd-Frank — all 2,307 pages of it — where do you begin at reform? It’s complex, open for broad interpretation and costly. It has suppressed the appetite for risk-taking and created marketplace uncertainty.

The cost to community banks — such as those in Detroit — is near fatal. Dodd-Frank requires they divert resources within their smaller infrastructures to cover compliance. Research from the Minneapolis Fed found adding just two members to their compliance departments turns one-third of the smallest banks unprofitable. For some, the cost is too high: 14 percent of community banks closed between 2010 and 2014.

That’s a blow to small business development. The New York Times in 2015 found that community banks accounted for more than three-quarters of agricultural loans and half of small business loans.

Dodd-Frank’s other ills include forcing non-bank entities to comply with unfitting bank-like regulations. Also, it gives special status to systematically important financial institutions (SIFIs) — more simply, really big banks — and the implied promise of their bailout should they hit another collapse.

The act toughened requirements for mortgage lending to prevent a future foreclosure crisis. But in doing so, it made it much more difficult for those in urban areas to get home loans. That is hampering Detroit’s comeback.

Even the good parts of Dodd-Frank are often hard to interpret. Its much-applauded Volcker Rule, which bans proprietary trading by many banks, is 900 pages long (with 2,800 footnotes).

Possible responses include changing the Financial Stability Oversight Council, creating resolutions for failed companies and adding reforms for the housing finance system.

Best case, Dodd-Frank should be replaced with a simpler law or laws that include important protections, such as increasing the Federal Reserve capital requirements for banks.

Democrats warn fiddling with Dodd-Frank will risk another recession. But the reality is the act has benefited big banks at the expense of smaller ones, has added enormous costs to the financial sector and has kept the economy napping.

The better approach is to release banks to experiment and grow, awaken the market with freedom to take risks and raise capital standards to withstand losses and naturally buffer failures.