Although the Dodd-Frank Act (Wall Street Reform and Consumer Protection Act) is now seven years old, its requirements have yet to be finalized and take effect in all the ways that may originally have been intended. Initiatives are underway to amend the legislation, including complete repeal of certain sections. The original legislation covered 850 pages, contained 16 titles, 37 subtitles, 1,500 sections and at the time of passage, required almost 400 subsequent rules changes through various federal agencies.
In a new research report, Dodd-Frank and Corporate Banking: Still Murky After All These Years, the author examines the legislation to understand how it has affected corporate banking entities, and as such, what might change should various possible adjustments be made during the current administration.
"It is difficult to quantify the benefits of the Dodd-Frank Act since it was intended to improve safety of the banking industry and fairness toward consumers in the abstract. The sweeping piece of legislation as structured left many unanswered questions about its potential impact, so we decided to take a look now and see what might be evident, commented Steve Murphy, Director of Commercial and Enterprise Payments Advisory Service and author of the report. "As one might expect, for bank holding companies, compliance costs have become a larger part of business unit operating expenses. There is also evidence of unbalanced commercial lending constraints and pressured revenue margins, which banks have to manage. But a more insidious, longer-term impact may come from the underlying structure of the legislation, which leaves rules changes as a contentious political playground."
Highlights of the report include:
- A detailed review of Dodd-Frank sections that are most directly related to corporate banking businesses
- Analysis of the incremental compliance costs, as well as possible benefits
- A detailed comparison of two scenarios showing the impact of the liquidity coverage ratio on balance sheet flexibility
- Discussion of the proposed changes to the law and most likely outcomes
- Decisions that banks can make to best manage their portfolios going forward.
1. Executive Summary
3. The Dodd-Frank Act
- Size and Scope
- Structure and Implications
4. Dodd-Frank’s Relevance to Corporate Banking
- General Applicability
- Corporate Banking Specifics
- Balance Sheet Squeeze
- Impact Assessment
- Volcker Rule
5. Looking Ahead
- Repeal, Revise, Adjust
- Actions Recommended for Banks
- Policy Influence on Money to Lend
List of Figures
Figure 1: The Dodd-Frank Act’s rule making remains behind schedule after seven years.
Figure 2: Effect of Liquidity Coverage Ration (LCR) on asset return (Illustrative)
Figure 3: Depository institutions have substantial excess reserves.
List of Tables
Table 1: Dodd-Frank compliance cost adds up.
Table 2: The Dodd-Frank Act’s capital adequacy requirements (adopted from the Basel III Committee recommendations)
Table 3: Selective lending to offset risk weightings contributes to revenue margin pressure.