Jeffrey P. Snider: There Are No New Banks; Dodd-Frank Hits Five


Today is the fifth anniversary of Dodd-Frank, the erstwhile government response to assure that the Panic of 2008 does not repeat. It was an ill-advised task to begin with as the panic itself took care of repetition. It is not, and never has been, past panic that should worry our future. Along with the legislation came the Consumer Financial Protection Bureau which seems to be accurate in its name about only its last word; it is in every way a bureau.

There have been a few efforts to define the law’s performance in its first half decade in existence, largely drawn upon partisan lines. Republicans are its fiercest critics, and Democrats at least acknowledge it exists and has some good ideas. The main problem with it is that it is now impossible to judge and can never really be even in the future. It is entirely open-ended, as even five years after passage most of the major rules have yet to be written. Anathema to limited government and a republic, the law is whatever it wants whenever it wants.

Two years ago, the CFPB decided it would look into regulating retirement investment, but not in any manner by which the word “regulation” would actually apply. The bureau not only wanted to define retirement investment by its own standards, which are, again, highly pliable to bureaucratic whim, but to actually “help” especially seniors manage their assets.

“That’s one of the things we’ve been exploring and are interested in in terms of whether and what authority we have,” bureau director Richard Cordray said in an interview. He didn’t provide additional details…
The bureau could claim jurisdiction through its Office for Older Americans, which was established by Dodd-Frank with a mandate to improve financial literacy. It is run by Hubert H. Humphrey III, the former attorney general of Minnesota.

While that never came to fruition, the CFPB simply continues to search for new areas by which to attain influence and even control. There is no set of rules but rather a loose conglomeration of ideas which allows them to conduct fishing expeditions into anything the agency decides it might not like. As you would expect, that opens the door wide for political rather than economic considerations for whatever falls under its influence.

More recently, they have gone after payday loans and especially prepayment cards and services. Under the auspices of consumer protection, the CFPB has declared overdraft fees as almost usury and has already established guidelines that have the practical effect of turning what is really a private payment processing activity (true money-like behaviorthat really does not have any special need to be part of banking) into something financial, and thus what was once a free market solution to banking asunder is nowdeclared as equally banking.

The issue of overdraft is somewhat of a Trojan Horse, as in the fine print they are alleging that when prepaid service providers make payments on behalf of overdrawn accounts they essentially become, if nowhere else, a financial institution. In other words, if you overdraw your card and Green Dot pays the bill anyway, even though they give you just one day to rectify, they have extended you a loan and that makes them a bank. What was once operating outside that realm will be brought inside, and once that legal distinction is eroded for all time (only slight hyperbole) the ground will be laid for all payment systems to come; including those that offer the greatest opportunity to move beyond banks in total.

The rise in prepaid systems is due to what the government calls “underbanking”, as if banking itself should properly be universal. They have essentially declared that a goal, couched in the class and racial demagoguery that has no business in innovation. What’s more, it has been Dodd-Frank itself that has been a leading cause of the recent rise in the “underbanked” population. From Congressman Hensarling’s (R) Wall Street Journal op-ed:

Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card. Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.

Rather than deal directly with TBTF and the issue of bank concentration, Dodd-Frank is having the opposite effect as it pushes more and more activity into a narrowed corridor of government-defined banking – and banking in which fewer institutions and businesses are able to navigate successfully. That agency issue is exacerbated further by the fact that almost all large bank function has been delegated to the Federal Reserve of all agencies. In other words, the law sets about concentrating banking, all under the expansive regulatory umbrella, and then reworks bank authority to the institution with a vested interest in reducing or eliminating competition within finance.

As a result, bank competition is essentially dead. The top banks are now incalculably larger than they were in September or March 2008 and there are no takers among entrepreneurs to knock them off in a better financial model less susceptible to catastrophic instability. Those that did try to fill a growing, yet limited, need, in payment systems, have been essentially warned that they will be treated as banks which at some point will likely destroy the service entirely.  Hensarling again:

Dodd-Frank was supposedly aimed at Wall Street, but it hit Main Street hard. Community financial institutions, which make the bulk of small business loans, are overwhelmed by the law’s complexity. Government figures indicate that the country is losing on average one community bank or credit union a day.

Limiting credit isn’t necessarily a bad result, especially in these serial asset bubble times, but arbitrarily throwing roadblocks and redefining finance to suit political agendas is not the way to ensure 2008 does not repeat. The best way to institute stability in the financial system is to allow competition (and failure) both indirectly, as payment systems, and directly as in new banks. Instead, there are no more new banks – at all.

In the five years since enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, regulators have approved only one new bank. Before 2010, by contrast, the Federal Deposit Insurance Corporation approved an average of 170 new banks per year.

Some of that is undoubtedly the broken nature of the wholesale banking system and “money” issues of the eurodollar standard. But that is precisely the point; if the eurodollar system is fatally damaged then something else needs to take its place. Instead, Dodd-Frank ensures that nothing will, essentially freezing the 2008 system into place without answering any of the difficulties that are still inherent in the model. The full intentions of the law seem to be stasis, shutting down and eliminating any chance for alterations, most especially free market-driven alterations, in banking. That might be a worthy goal and a useful process if banking in 2008 (or anything since 1995) represented a stable and expedient platform, but it is most decidedly not. The government has taken something that doesn’t work and assured that it remains dominant.

Acknowledgement of Dodd-Frank’s role in the heavily stunted systemic liquidity capacity is widespread – even the law’s proponents admit to that effect (though not as if this was a serious problem). There is little appreciation, however, for exactly why that is apart from some surface discussions about “capital” efficiency and bond inventory or warehousing profitability. The dealer system broke starting in August 2007 due to, again, inherent flaws of which the Fed itself is the primary.

Under that governing dynamic it is no wonder dealers have eschewed further (and now on an accelerated schedule) participation. Central banks have been trying to fill the role and have done so clumsily and usually well behind the curve, but the main problem remains – there is nothing built up to pick up the slack. Dodd-Frank has contributed to that by creating huge barriers to entry preventing any kind of avenue to reduce the footprint of banking on the economy. That is what all this adds up to, as 2008 was essentially a market-based rejection of its prior, blind acceptance of banking under the wholesale model. Instead of allowing that natural reversion to fulfill its stabilizing trajectory, regulation instead prioritizes, exclusively, going back to what no longer works because it preserves the elements of control.

The biggest problem is that regulators, including the Fed’s policy bodies, still cannotproperly define a bank (or a “dollar” for that matter). It is clear that they operate under the assumption of the traditional deposit model when that style of banking ended as a marginal influence with the S&L crisis. That’s bad enough and a cause of instability all its own, but to respond to everything by lumping all banks into that same view and then empowering a government agency to open-ended control and direction under radically mistaken assumptions and understanding is just asking for trouble. So far, the “dollar” world has responded in kind, especially in this, Dodd-Frank’s fifth year.