Why Bigger Is Not Always Better: Dodd-Frank & Its Impact on Small Banks & Businesses

Authors

Sarah King

Abstract

(Excerpt)

Imagine that the year is 2006. Along with partners and investors, you have just taken one of the biggest risks of your life and founded a small business. Specifically, your business acts as a broker of financial instruments known as energy derivatives; it matches buyers and sellers of futures, options, and other derivatives, and a portion of the money made from the trade is collected as a fee for your services. For the most part, the business runs smoothly. You’re rarely stressed, your customers are satisfied with your services, and you and your co-workers make good money.

Imagine that the year is 2008. A financial crisis devastates the world economic markets and puts Wall Street in a tailspin. Excessive risk-taking by large banks and the collapse of the U.S. housing market are largely to blame, but you are far removed from the core of the economic meltdown. In fact, small businesses like yours pose barely any risk to the financial system when compared to the institutions that caused the 2008 collapse. Your business emerges from the recession relatively unscathed, but other institutions are not so lucky.

Now imagine that the year is 2010. Your business is finally turning a profit and things are looking up. Then comes Dodd-Frank. The Dodd-Frank Wall Street Reform and Consumer Protection Act introduces a regulatory framework to prevent the Great Recession of 2008 from happening again in the future. In practice, however, Dodd-Frank causes more harm than good for you, even threatening your collapse.

The most detrimental impact of Dodd-Frank is its high compliance costs. You must now comply with a slew of regulatory requirements that take precious time and money away from serving your clients. The Act adversely affects your business in ways that Congress did not imagine. Dodd-Frank does not discriminate when it comes to the financial instruments it regulates—therein lies the problem for your small business. Dodd-Frank regards your business and the derivatives it handles as posing the same large risks as other types of businesses, even though the actual risks posed by your business and theirs vary dramatically.