Laws affect the community in both positive and negative ways. Their importance is being able to maintain the peace, and depending on how they are enforced will determine the effects that they have on the community is positive or negative. Economically a law may lead to an increased risk in the economy of a society or may lead to a decline. The paper will look at the effects of the Dodd-Frank Act to the local banks.
The Dodd-Frank Act.
Dodd-Frank Act can be said to be the product of desperation in the face of harrowing financial crisis and outrage at the big financial institutions that were center of trouble. In the summer of 2008, there was the collapse of the American Residential real estate market. This lead to some unavoidable effects like unemployment, a decrease in the credit market and others. What followed was policy-making while trying to cab the impact of the collapse. During the period Dodd-Frank come up with a policy that comes to be enacted as the Dodd-Frank Act in January 2010.
The Dodd-Frank regulations were first the Creation of financial stability oversight council. Secondly provision of the methodical wind-down of significant banks and avoidance of a repeat of too big to fail; Consumer protection through consumers Financial protection Bureau; increase honesty for the derivative markets; and mortgage reforms.
The Dodd-Frank Act not only did it fail to address the problem that precipitated the crisis adequately, but it imposed burdens on businesses that may be costly to carry. Among these businesses affected is the community bank. Determining how Dodd-Frank affects community is not easy given the statue’s immensity, the lengthy rulemaking process, and even other factors that influence the number, size, and profitability of a community bank.
The implementation of the Act was meant to prevent and if possible to stop an occurrence of such a financial crisis in the future. The Act wanted to protect the consumers and the stability of the financial system. Community banks serve millions of people. Breaking down their model would mean that many people are left unserved/ underserved. One effect of the Dodd-Frank Act is that it forced the community banks to merge, consolidate or go out of business. The result of this is that there has been an increased concentration of assets on the “too-big-to-fail” banks.
Community banks have served for decades and are essential in rural areas. They are vital providers of business loans. They are also known for offering personalized service and meeting the needs of the resident and businesses. They can serve the community in a much better way than the non-local banks. The advantages that they have is that they are deeply integrated into the community, they have deep ties, there is always a daily interaction with the community, and thus they can be said to know the community problem better. The community banks, therefore, play a vital role in the community economy and also the nations concerning the small businesses and the communities.
The community banks did not cause the financial crisis in 2008. They were never involved in residential mortgages, and they did use derivatives to engage in risky speculations to maximize return. The policymakers enacted the Dodd-Frank act to avoid the “too-big-to-fail,” but it has worked in the opposite of that. The bill has so far forced the consolidation of the few megabanks by increasing the competitive advantage of the larger banks and financial institutions as by (Lux). The Act has made it even harder for the community banks customer to be even able to obtain loans. The fact that the act encourages financial product standardization will undermine the relationship banking model. In doing so, there will a decrease in the diversity of consumer banking options. The credit and banking services have even become more expensive for small businesses, the rural communities, and the companies that are less profitable than the large banks to serve.
The traditional financial institution like the community bank is fundamental as they tend to increase the conventional financial service even in time of crisis. The effect of the Dodd-Frank Act can be seen to undermine the small banks. In doing so, it threatens the growth of the local economy and at the same time the country’s economy.
The setting of high standards with the aim of creating an environment that would prevent the repeat of 2008 financial crisis was the aim of the act, but it failed to develop enough details on the law that would be used to protect the community banks. Too many regulations have led to the manager of the banks to lose their ability to focus on their main agenda of serving the customers. The burden becomes worries, and they can divert resources and the time needed for the day to day activities. This may lead to the failure of the bank as by (Pierce)
Due to the need to comply with the regulation that is stipulated in the Act, The community banks lack sophisticated legal compliance staffs that will be able to interpret the rules and mitigate through the various way of complying without the compromising of their daily activities. The Act has created an unbalanced competitive landscape as the community banks, are faced with competition from the well-established firms, credit unions (do not pay taxes), securities firms, and other larger rivals that are deemed “very” important by Dodd-Frank.
The policy although has and is continuing to stabilize and standardize the economy has led to the decline of the community bank. The degree to which Dodd-Frank act affected the community bank isn’t easy to understand, but the regulatory burden that has fallen on their hands is heavy.
Lux, Marshall. Dodd-Frank Is Hurting Community Banks. 14 April 2014.
Pierce, Hester. “Regulatory Burdens: The Impact of Dodd-Frank on Community Banking.” Marcus Center: Gorge Mason University. July 18, 2013.