On Monday, May 1st, President Trump spoke to representatives from the Independent Community Bankers of America (ICBA), committing to cut the ‘red tape’ imposed by the 2010 Dodd-Frank financial regulatory law. His repeal promises were met with a great deal of excitement from the community bankers present, in part because of the reminder that the number of federally insured small banks dropped from 7,357 in 2011 to 5,980 in 2016—at least in part because of the regulation. ICBA representatives including CEO Cam Fine reiterated the general tone, saying that community banks face a “pressing need for regulatory relief.”
President Trump is an outspoken critic of Dodd-Frank. That alone is cause for banks to expect he will push for a relatively substantial overhaul of the legislation. Even as the administration voices its opinions and plans for regulation, however, the actual fate of Dodd-Frank legislation remains unclear. This law is born from more than 20,000 pages of regulations—meaning that while it may be renovated, the likelihood that Dodd-Frank will be reformed entirely is low to impossible.
The reality of an evolution has caused many industry analysts to question what a rollback of Dodd-Frank will look like and what impact it will have on small banks and businesses. Ultimately, the goal is to put in place enough oversight of the financial industry to create confidence in economic stability and security that many investors feel currently does not exist.
As President Trump and congressional leaders begin to build a framework around regulatory reform, the hope is for an outcome that loosens the regulatory controls currently stifling the progress of banks and the communities, businesses, and individuals they support. Frank Sorrentino, CEO of ConnectOne Bank, shared four recommendations for reform from the perspective of a bank leader.
Recommendation One: Tailored Regulations
Rather than basing regulation on the size of banks, base compliance requirements on the complexity and risk profile of individual banks. Currently under Dodd-Frank, compliance costs are aligned to the size of the bank—despite the fact that a $5 billion bank may be significantly more risky than a $10 billion bank.
Recommendation Two: Remove Red Tape
Currently reporting requirements are incredibly hard for small banks to manage. Many lack the staff and resources to meet regulator’s requests for reporting, paperwork and information with immediacy. While this is a good reminder of how important it is for banks to gather, store, and maintain reliable data, many community banks are just putting those resources in place. Slow the demands, or work with community banks to get the needed information without draining their resources and growth.
Recommendation Three: Eliminate Overlapping Rules
Banks are subject to overlapping rules, meaning that they may follow CFPB rules yet still be cited by a prudential regulator for other matters requiring attention.
Recommendation Four: Give Banks Decision-making Power
Regulators favor standardized products, and Dodd-Frank has made it much more difficult to tailor loan and deposit products to customers. By returning to “Know Your Customer” standards, banks will be able to put their uniquely intimate knowledge of their local community to good use. They can assess risk and tailor recommendations and loan decisions based on important intangible factors that even the smartest algorithms miss.
With so many regulations and policies in flux, it’s difficult to know if, how, and when any of these—or other—reform recommendations might happen. What we do know is that over-regulation has challenged banks and slowed economic growth. Our hope is that changes will ease burdens and offer sensible solutions for community banks in the coming years. Whether that change comes through a full or partial repeal of Dodd-Frank, or other mechanisms being discussed, such as the Financial Choice Act, we will continue to monitor the decisions and to post updates as details become clear. Please share your thoughts with us and don’t hesitate to get in touch with your HORNE Financial Institutions advisor if you have any questions about how the new regulations impact you.
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