by Jeff Sovern
Congress enacted the Dodd-Frank Act in 2010. Since then, law school applications have plummeted by more than 40,000. Therefore, the Dodd-Frank Act must have killed law school applications.
At least, that's the conclusion I came to after reading Todd Zywicki's blog post, New study finds that Dodd-Frank has promoted industry consolidation and killed community banks, and Carrie Sheffield's piece at Forbes.com, Dodd-Frank Is Killing Community Banks.
But maybe I'm not being fair. The study, The State and Fate of Community Banking, by Marshall Lux and Robert Greene at Harvard's Kennedy School, argues that the cost of complying with the Dodd-Frank Act is what's doing in the community banks. For example, the study notes that in "2012 congressional testimony, William Grant, then chairman of the Community Bankers Council of the American Bankers Association, made a “very conservative” post-Dodd-Frank estimate of total industry compliance costs at $50 billion annually, or 12 percent of operating cost." After all, financial industry lobbyist estimates about compliance costs are often reliable. See, for example, this post about how something predicted to cost $5 and be "staggeringly inflationary" cost only 59 cents when implemented. But here's something else from the Lux-Greene report:
A 2014 Mercatus Center at George Mason University survey reported that over one-quarter of community banks (defined as those with less than $10 billion in assets) would hire new compliance or legal personnel in the next 12 months, and that another quarter were unsure about whether they would do so. It also found over one-third of banks had already hired new staff in order to meet new CFPB regulations.
Well, that's not so good. Except that the George Mason study also stated "The median number of compliance staff for the small banks participating in the survey increased from one to two employees." Perhaps hiring one extra employee in response to measures designed to prevent another Great Recession isn't such a bad tradeoff.
If you detect sarcasm in my post, maybe that's because I've seen other times when people claimed compliance costs were crippling. For example, critics of the Community Reinvestment Act used to claim that it imposed significant compliance costs on institutions and also charged that it forced lenders to make loans they might otherwise not be able to justify making. See Jonathan R. Macey & Geoffrey P. Miler, The Community Reinvestment Act: An Economic Analysis, 79 Va.L. Rev. 291 (1993). Then we learned that many lenders that weren't even subject to the CRA were making CRA-style loans–meaning that the CRA was not driving the making of those loans–and that a study conducted by the community bankers themselves found that small banks spent an average of only $84,445 annually to comply with CRA while larger banks spent $115,270. Grant Thornton, Independent Community Bankers of America, The High Cost of Community Bank CRA Compliance: Comparison of “Large” and “Small” Community Banks vi (2002). It's enough to make you wonder whether every time Congress passes a law regulating banks, and the number of community banks declines, someone will blame Congress for the decline. Oh and by the way, according to the Lux-Greene report, community bank market share was already declining (though at a slower rate than since 2010). But then, nothing else has relevant has happened in the country in the last five years. The economy has been booming, right?
And what remedy do Lux and Greene suggest? How about subjecting the CFPB to non-binding cost-benefit analysis from the Office of Information and Regulatory Affairs? Never mind that the Dodd-Frank Act already directs the CFPB to consider costs and benefits when adopting rules or that rules have been known to languish at OIRA for more than a year. They also recommend that Congress create a "bipartisan commission aimed at streamlining existing financial regulations." Because we need another financial crisis and Great Recession that financial regulations were put in place to prevent.
Look, no one supports rules for the sake of rules. But sometimes, rules are needed, like to prevent a Great Recession. And sometimes, especially in times of transition, rules generate compliance costs. Those costs sometimes go down after the new systems are fully in place. If hiring one new employee prevents another Great Recession, isn't that a cost worth incurring, especially since the cost may be temporary–and exaggerated?