The Two-Year Anniversary of Dodd Frank: The Impact on Retail Banking

Since the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July of 2010, the banking industry has seen sweeping changes, from large conglomerate banks to smaller, community-based financial institutions.  The lawmakers who supported the bill lauded it as an effective safeguard against another financial crisis, but critics viewed it as punishing the institutions that weren’t responsible for the recent recession.

The effects of Dodd-Frank may seem like a matter of opinion to many, but there are some facts every institution should know.   The federal government now has more access to the operations of financial institutions and can probe as deeply as they deem necessary to protect consumers. Not only are they allowed more access, but they may exert greater influence on the daily operations.

With new regulations come more incremental costs. Bank employees will need training to comply with all the rules implemented by Dodd-Frank and institutions may have greater capital requirements. Depending on performance, some banks may find themselves being restricted from offering certain services, and some financial institutions have already discontinued some services, such as mortgage lending.

The FDIC has taken a serious interest in risk assessment when it comes to loans and to a bank’s ability to deliver its interest rates. With the sudden growth of the FDIC as an agency, it appears banks should expect even more regulation.  Customer relations may also require more documentation, such as branch call recording and recording of other face-to-face interactions within the retail branch.  Most banks are ill equipped to deal with the possibility of recording all of their customer interactions.

Many fear that the new rules will require regulators to paint all risk assessment with too broad a brush, preventing consumers from obtaining loans and stifling bank profits. Bankers may no longer be as innovative as they were once were, and many loans may be terminated out of fear of being classified as “troubled” by the feds.

The Dodd-Frank Act has now created the Financial Stability Oversight Council, overseeing all financial regulatory agencies. All financial institutions will feel the effects of Dodd-Frank, and all will pay a price for compliance. To simply comprehend all the bill’s rules, plus the regulations that will come from the new agencies, banks will have to establish new internal organizations to understand the Act and assure compliance. While some believe that this Act may stifle innovation, it should be seen as a challenge to the industry to be more creative in how they increase their profits and deliver the best possible customer service.

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