Over the next year there will be a great deal of scrutiny around the implementation of Obamacare. Healthcare affects everyone, and no one will be left out, from the enrollment process to the delivery of care. There will be less discussion around the impact of Dodd-Frank as the major implementation dates approach. Most Americans do not work at a hedge fund or a financial institution, so the direct impact of implementing an overwhelming set of regulations will be less obvious.
Nevertheless, it is all about the “unintended consequences” that will impact Americans, even though they cannot put a legislative tag on it. Potential consequences don’t relate to the need for visibility around derivatives – especially those that are based on the value of mortgage-backed securities. Where the consequences are less clear and less predictable are those that emerge from the more ad-hoc rule based responses to financial crises. The powers afforded regulators directly tie to the experience of the Lehman collapse.
The Lehman bailout was followed quickly by the Bear Sterns bailout, setting up unreasonable expectations that the government would bailout any big financial institution, and was further supported by the bailout of Fannie Mae, Freddie Mac and AIG. Dodd-Frank still requires special treatment of the largest financial institutions, offering the ability of banks to borrow money at lower rates than smaller banks. This has led to a flurry of activity around the purchase of smaller regional banks by larger firms. So rather than encouraging the break up of the larger institutions, Dodd Frank has encouraged consolidation.
Even though unintended consequences are, by definition difficult to predict, the following are some that are being realized:
Fewer and bigger banks: Because of the costs of Dodd-Frank compliance, banks will have more incentives to consolidate into the “too-big-to-fail” banks the bill was designed to eliminate.
Higher consumer costs: With higher regulatory costs, banks are hiking fees elsewhere. It is becoming more expensive for consumers to use banks.
Fewer mortgages: With Dodd-Frank and pressure to buy back bad home loans, big banks are becoming increasingly inclined to pull out of the mortgage business.
Tighter trade credit: Dodd-Frank provision requires banks to comply with new liquidity and capital standards, including backup liquidity lines. This may have a negative effect on the ability of banks to extend trade credit and thus impact the economy.
The unintended consequences are similar to the US tax code, with all of its complexity, leading to unnecessary overhead and additional cost passed on to the consumer. Banks will be forced to charge higher rates on loans to recoup their costs, and add more fees or reduce their profits.
Dodd-Frank is destined to fail in preventing the next financial crisis. The law doesn't address what many regard as key culprits in the financial crisis — the roles of Fannie Mae and Freddie Mac, the credit ratings agencies and the fact that the financial system is more consolidated than ever in the hands of a few “too-big-to-fail” banks. Ultimately it will have to be amended to deal with the large number of “unintended consequences.”