Twelve years ago on July 21st, following the financial crisis of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in an attempt to prevent excessive risk taking by financial institutions and to protect consumers against abuses related to credit cards , mortgages and other financial products. The act is considered the most far-reaching regulatory banking reform in history.
Fast forward to today, one constructive benefit of these reforms is increased capital standards, which has situated the banking system into one of the strongest positions it’s ever been, despite a possible looming recession. Banks have more capital and liquidity today than they have ever had and according to the Federal Reserve’s latest ‘Stress Test Results’, banks retain enough capital to handle an economic disaster. What’s more, large bank capitalization levels in 2008 were nowhere near where we are today, proving we are far better equipped to handle any storms ahead.
That said, the thrust of much of Dodd-Frank’s regulations may have been a solution looking for a problem and allowed for the rise of the non-regulated neo-banks and FinTechs to prosper. The question still remains – is regulation where it should be? With so many mergers and acquisitions (M&A) in the banking industry, as well as digitization and tech adoption during the pandemic, it could be time to take a look at the Dodd-Frank Act and update it to fit into the world we are currently living in
A recent report by Deloitte discusses the regulatory outlook for 2022 and highlights the evolution of banking, people’s understanding of what banking is and the ways it is challenged by industry players as well as state, federal, and global regulators. In the report it references a number of regulatory topics that are top of mind in the finance industry, including compliance, digital assets, data infrastructure, technology, and consumer protection – among others.
Some of these issues are already being addressed. For example, back in March, the Federal Deposit Insurance Corp (FDIC) sent out an information request on potential changes to its merger review process. The goal of this request is for regulators to ask more questions and set up more hurdles to clear before signing off on proposed deals involving more than $100 billion in assets. Since then, we have already started to see a slowdown in M&A activity.
For regional and commercial banks like ours, M&A deals have provided us with tools to navigate the changing environments amid the pandemic. And new regulation supports the case for most deals, given digital demand and the necessity of scale in banking. As banks shift their models to efficient growth, we will continue to see more transactions and fintech partnerships in the banking space.
Additionally, the Federal Deposit Insurance Fund just proposed raising deposit insurance assessment rates by 2 basis points for all insured depository institutions. While this, in theory, makes the system safer, in actuality, it reduces the capital available to banks for lending into their communities.