Why do Republican lawmakers oppose the Dodd-Frank Act?
Many Republicans fear that Dodd-Frank is a classic example of regulatory capture. Regulatory capture is the idea that instead of serving the public, regulations will serve the interests of the firms they regulate. This article explains the viewpoint that Dodd-Frank is a boon to big banks, arguing,
While Dodd-Frank mandates higher capital requirements for large banks and exempts issuers with under $10 billion in assets from punitive debit price controls, it tilted the playing field decidedly to giants’ advantage. The more onerous the regulatory burden, the more difficult it is for smaller banks and new entrants to compete.
Massive regulation provides a deep moat protecting large financial institutions against competition from community banks and innovators. B of A, Chase, Citi and Wells Fargo have legions of lawyers, compliance staff and lobbyists to manage regulators, and they’re hiring more. Wells Fargo increased government relations spending by more than 40% in 2011.
Paul Ryan voiced these concerns, arguing
Dodd-Frank goes in the wrong direction. It creates a permanent bailout fund. It deems very large, interconnected banks as too big to fail, meaning the government will back them up if they go down. And that means these really large banks can go into the markets and get money at a much cheaper rate than your community bank.
Another champion of this viewpoint is Texas representative Jeb Hensarling who argued that Dodd-Frank, helped big Wall Street banks while imposing regulations on small community banks that did not cause the financial crisis.
Dodd Frank charges a fee (or tax, since it is involuntary) on banking which it uses to build a $50 billion fund to be used in case of a banking crisis.
Republicans oppose taxes.
The 2008-2009 banking bailout was unpopular. The Republican expression of this is to oppose paying money. (Contrast with the Democratic response of taxing banks for future bailouts.) Dodd Frank codifies the government's responsibility to bail out the banks in future troubles. Of course, that has been an implicit rule since the Great Depression.
The $50 billion bailout fund is less than was needed to bail out the banks last time (around $500 billion). It might be enough to cover the losses from that program (the government paid cash for assets which it later sold to recover the bulk of the funds).
Dodd Frank increases the regulatory burden. Since the regulatory burden doesn't necessarily scale, this has a disproportionate effect on small banks. Large banks can amortize the costs over their entire portfolio. Small banks have smaller portfolios.
Some of the consumer regulations shift expenses away from late fees and other expenses that usually hit a limited number of customers. This is good for those customers but it is bad for everyone else, as it leaves more costs to be covered elsewhere. It's possible that Republican voters are more likely to be bankers than the kind of customers helped by Dodd Frank.
The opposition to Dodd-Frank is several points:
- It is a massive increase of regulation: The 600 page act was called the "Patriot Act" of finance. Any increase in regulations always means that the action being regulated has more hurdles and has government employees that need to monitor, enforce and punish in connection with the regulation. The question is whether these regulations
A. Correct the problem that caused the crisis
B. Do not add a burden to competition
The opposition believe that it is not passing either of those tests
- Some of the regulations may make the banking system more unstable. It is believed by the opposition that the restriction of commercial bank investments (Volcker Rule) reduces the nimbleness of the banks ability to hedge risks. And further it is affecting a part of the banking system that had nothing to do with the crisis for which the Act was passed to relieve. It is believed by the opposition that it was investment Banks that caused the failure not commercial banks.
Dodd-Frank was mostly a reaction to the financial meltdown of 2008, but it contained some Democrat regulatory ideas thrown in. Some examples
- The Durbin Ammendment - When you use a debit card to pay for things at a store, it runs through the credit system and banks would pocket a fee. This rule capped the rate banks could charge, with the theory being that merchants would pass those savings along to consumers. It's a dubious claim at best, and the net result was lots of banks stopped offering free checking accounts (my own bank now has a minimum direct deposit or I pay a fee).
- Orderly Liquidation - A much reviled phrase after the 2008 bailouts was "Too big to fail"(TBTF). This is an extension of that concept. If a bank, or even a private institution, is deemed TBTF, Federal regulators can actually seize the company and liquidate it.
- Bureau of Consumer Financial Protection - This one is probably the largest source of angst. The CFB was spearheaded by Elizabeth Warren (before she became a Senator) and ostensibly exists to protect consumers from bad financial practices. In reality, it has focused predominantly on car lenders. Their investigative processes are opaque and may possibly be abusive. Right now the director is fighting a lawsuit that says the President can fire him. Since there's no accountability to the President or Congress, it's not clear that anyone but the courts can reign this agency in.