To the editor:
While there has been much discussion about the upcoming “Fiscal Cliff” and the Affordable Care Act aka “Obamacare,” there has been a lack of coverage on a bill that affects nearly every citizen of the world: the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. How does this 2,000-plus page law affect you?
According to the Bureau of Labor Statistics, the financial industry employs about 6 million people but as an industry it touches all of us. The Dodd-Frank Act was intended to be transformative in such a way that hasn’t been seen since the Great Depression. To understand the intent of the transformation, it helps to revisit a little history.
The Banking Act of 1933 (Glass-Steagall Act) was meant to separate commercial banking from investment banking and prevent another Great Depression. The Financial Modernization Act of 1999 (Gramm-Leach-Bliley Act) repealed the Banking Act of 1933. The new law “modernized” the financial industry by once again allowing commercial and investment banking entities to operate under one umbrella.
Of course, 1999 was a different, nearly nostalgic time: the Euro officially entered the world markets on Jan. 1, and Lance Armstrong won his first Tour de France on July 25. Now the Euro is struggling, and Lance Armstrong has had not one but all seven of his titles stripped. The Financial Modernization Act was signed into law on Nov. 12, 1999; this was merely a few months before the stock market bubble peaked and subsequently burst, in the year 2000.
It wasn’t until the end of 2007 that we began to see the negative effects of the unbridled financial industry. The 2008 Great Recession was preceded by a housing industry bubble and a peak number of financial instruments, products and speculation.
In 2010, the intent of the Dodd-Frank Act was to undo the damage done to our economy by a poorly regulated financial industry.
The Dodd-Frank Act is supposed to stop big banks from doing bad things — like failing. Unfortunately, what it’s been better at is stopping small banks from doing good things — like lending. On Sept. 13 of this year, the Government Accountability Office (GAO) completed a report on the impact of Dodd-Frank implementation on community banks and credit unions.
The report is 88 pages long and focuses on the 398 proposed rules required under Dodd-Frank; nearly two-thirds of which have not yet been implemented. Smaller community banks and credit unions are unequally impacted by this regulation. As opposed to the larger banks, small banks don’t have large compliance offices to deal with all of the new rules.
Small banks face two choices: consolidate or close. The GAO’s report highlights “20 percent of lending by community banks can be categorized as small business lending, compared to 5 percent by larger banks.” If community banks merge into bigger banks or just disappear, small business lending will continue to decrease.
Consider that over the course of history it was our relationship with neighborhood banks that help build American exceptionalism. Private merchant banks helped build the family farm and gave birth to the industrial revolution of the 19th century. Local bank relationships financed the business startups of the 20th century.
We celebrate the “relationship bank” every year with the holiday classic, “It’s a Wonderful Life.” Do we root for Mr. Potter or George Bailey and the neighbors of Bedford Falls? Few of us live in small towns, but many of us still have relationships with small banks. They finance our education, new businesses, cars and homes.
What’s bad for small banks is bad for small business. What’s bad for small business is bad for our economy and our daily lives. We need to refine Dodd-Frank into a better bill. It needs to become clearer and less demanding upon the community banks and credit unions that had little or nothing to do with the financial crisis of 2008.
Congress will be busy this lame duck session, but afterwards they will have other important legislation to address; legislation that affects every citizen of the United States and every citizen of the world.
The financial sector, like the Dodd-Frank Act is too big to ignore.
Jason Howell, Arlington