GAO Report Cites Increased Compliance Burden from Dodd-Frank Act
Commentary by Steven Lofchie
The Government Accountability Office ("GAO") reported that community banks, credit unions and industry associations cited an increase in the compliance burden from the Dodd-Frank Act. The GAO report stated that the full impact of the Dodd-Frank Act "remains uncertain because many of its rules have yet to be implemented and insufficient time has passed to evaluate others."
The GAO report examined: (i) regulatory analyses by federal agencies and interagency coordination, and (ii) the impact of selected Dodd-Frank provisions and related implementing rules on financial stability.
From interviews with community banks, credit unions and industry associations, the GAO drew the following conclusions:
- Compliance Burden: Financial institutions reported increases in staff, training and time allocation for regulatory compliance and updates to compliance systems. Some industry officials reported a decline in specific business activities, such as loans that are not qualified mortgages, due to litigation concerns or not being able to sell those loans to secondary markets.
- Availability of Credit: There have been moderate to minimal initial reductions in the availability of credit. Regulatory data has not confirmed a negative impact on mortgage lending. However, these results do not necessarily rule out significant effects or the possibility that effects may arise in the future.
- Funding Costs: A GAO regression analysis suggests that the Dodd-Frank Act has had little effect on funding costs and may be associated with improvements in some measures of safety and soundness.
- Swaps: Indicators of the swap reforms suggest that holding companies have been requiring their counterparties to post a greater amount of collateral against derivatives contracts.
The GAO developed indicators to monitor key risk characteristics of nonbank financial companies designated for supervision by the Board of Governors of the Federal Reserve System. Because few rules for these companies have been finalized or implemented, these indicators are intended to provide a baseline against which to monitor future trends.
Commentary
If ever a finding came under the heading of "as surely as the sun rises in the east," it is that Dodd-Frank has increased regulatory costs. That said, based on the structure of this report, for reasons that were not the intentions of the GAO, the costs of Dodd-Frank are significantly understated. As a starting matter, the report deals with the costs imposed only on a very small subset of financial institutions. Secondly, the report covers only those rules whose costs to the economy are estimated to be at least $100 million; according to the GAO study, that applies to only 26 individual rules under Dodd-Frank (notwithstanding the fact that there have been certainly many hundreds of rules, perhaps thousands, adopted by the government under Dodd-Frank). Thirdly, only a limited percentage of the rules adopted by Dodd-Frank have even come into effect. And fourth, as some of the regulators indicated, it is not necessarily feasible to isolate the burdens of the Dodd-Frank rules from the burdens of all the other new rules not mandated by Dodd-Frank.
Ultimately, Dodd-Frank is such a gargantuan mess of a statute, it will probably take a full decade to implement all of the rules required by it. One would certainly hope that it will be possible for the government regulators to do some more big picture thinking about what is working, what is not, and at what cost, before this decade has run.