The case for strengthening financial reform
While the Dodd-Frank Act recently celebrated its seventh anniversary, some critics have been gunning for the landmark reform, aiming to either water it down or gut it completely. This would be woefully misguided, as there is evidence that the regulations set forth by Dodd Frank, which was enacted in the aftermath of the financial crisis, do not hamper lending or stifle economic growth.
On the contrary, this Republican talking point is not backed up by facts. As Paul Volcker, former chair of the Federal Reserve (Fed), pointed out a few months ago, bank profits are at record highs, returns on banking assets exceed 1 percent, loan growth is exceeding GDP growth and the economy is close to full employment.
Borrowing costs have decreased, making it easier for consumers to pay their personal loans and credit card balance, and high-cost mortgages have become less common.
Close to 30 million Americans have received compensation from the Consumer Finance Protection Bureau (CFPB) after suffering financial wrongdoing, another positive result of the Act.
Further, banks have substantially improved their capital position, with the largest U.S. banks recently passing Fed stress tests.
"This year's results show that, even during a severe recession, our large banks would remain well capitalized," Jerome Powell, governor of the Fed, said in a statement. "This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough."
All 34 major banks that took these tests succeeded, the third time in a row U.S. banks have generated this result.
Thus far, the Dodd-Frank Act has built a strong foundation of regulations that have made our financial system safer and more robust. However, this progress has done little to deter critics.
Indeed, President Donald Trump campaigned on a promise to dismantle the landmark reform, and since being elected, he has repeatedly spoken out against the act. In April, he signed executive orders aimed at limiting the power of regulatory agencies by having Treasury Secretary Steven Mnuchin look into certain authorities granted to these organizations.
In June, Mnuchin followed up by releasing a nearly 150-page report suggesting that several of the act’s changes be eliminated.
That same month, the House of Representatives approved The Financial CHOICE Act, which would target many of the changes made by Dodd-Frank, including the empowerment of the CFPB.
The legislation, which many have predicted has very low odds of passing the Senate, would remove many of the agency’s powers, including its ability to prohibit arbitration and its authority to disallow bank products and services when deemed necessary.
Even if this legislation ultimately fails to receive the needed approval, Trump could potentially have the CFPB refrain from enforcing certain rules set forth as a result of Dodd-Frank.
Any such efforts to water down the efficacy of the Dodd-Frank Act could prove harmful to the financial services industry. The implications of paring back these regulations could be widespread, affecting areas ranging from lending to the capital requirements of banks.
A perfect example of an area that will suffer without the regulations created by Dodd-Frank is the global remittances sector. This landmark reform has provided several payment-related consumer protections, requiring banks to establish processes that provide greater transparency by ensuring customers receive full disclosure of the key information they need to make transactions.
Thanks to Dodd-Frank, these financial institutions must disclose crucial information about remittances made to recipients outside the U.S., including the monetary value of the transfer, the cost of the transaction and when recipients will be able to access funds.
Should these consumer protections disappear, it will only make it easier for the players in this particular market to gouge their customers with high prices. The global remittances sector already suffers from an anti-competitive marketplace that drives up consumer costs.
As of 2015, Western Union (NYSE:WU) , Moneygram (NASDAQ:MGI) and Ria Money Transfer, the three largest players in this space, had 35% of the market. Western Union, the market leader, commanded a 15% share at the time. To solidify its position, the company has had its agents sign exclusivity clauses that forbid them from working with other money transfer operators (MTOs).
More than 20 countries have reacted to these exclusivity clauses, which hamper competition and hurt consumers, by making them illegal for money transfers – but this concerted action has failed to change Western Union’s business model.
In fact, Western Union has managed to pass its expensive fees and foreign exchange margins on to customers. People in sub-Saharan Africa, which represent a major chunk of the estimated 800 million people worldwide who depend on remittances, can pay fees approaching 15%.
While European and African leaders have pledged to cut the expenses charged for these remittances to less than 3% of the total payments sent by 2030, the average fees for sending remittances have remained largely unchanged.
All of these moves have taken place in an effort to show that economic growth is intrinsically linked to the welfare and amount of disposable income of consumers. If lawmakers gut Dodd-Frank, it could help enable predatory lending, lessen the capital requirements designed to keep banks solvent and also help fuel the substantial commissions that MTOs collect for processing transactions.