Skip to main content

Has Dodd–Frank affected bank expenses?

Abstract

This paper examines the potential effects of the Dodd–Frank Act of 2010 on banks’ noninterest expenses. Using data on U.S. bank holding companies from 1995 through 2016, we test whether noninterest expenses increase following the passage of the Dodd–Frank Act or in relation to the number of banking regulations implemented after Dodd–Frank. We analyze subsamples of banks above and below $10 billion in total assets and consider total noninterest expenses, salaries, non-salary expenses, and specific subcategories of non-salary expenses: legal, consulting, auditing, and data processing. Non-salary expenses for both large and small banks show a one-time increase after Dodd–Frank, while salary expenses tend to increase with regulations. The results indicate that total noninterest expenses for the banking system are higher on average by more than $50 billion per year compared to before the Dodd–Frank Act.

This is a preview of subscription content, access via your institution.

Fig. 1

Source: McLaughlin and Sherouse (2015), Code of Federal Regulations Title 12

Fig. 2

Source: Consolidated Financial Statements for Bank Holding Companies (Y-9C) reports

Fig. 3

Source: Consolidated Financial Statements for Bank Holding Companies (Y-9C) reports

Fig. 4

Source: Consolidated Financial Statements for Bank Holding Companies (Y-9C) reports

Notes

  1. This is consistent with Calabria (2009) who finds that the budgets of U.S. financial regulatory agencies rose by 21% in real terms between 2000 and 2008.

  2. The Fed, together with the OCC and the FDIC, first implemented stress tests through the Supervisory Capital Assessment Program (SCAP) in 2009. SCAP was designed as a one-time event to ensure that the most systemically important banks had sufficient capital to withstand a significant economic downturn (Rubinstein 2012, p. 6).

  3. For details on specific CFPB regulations, see http://www.consumerfinance.gov/regulations/.

  4. As Peirce et al. (2014, p. 63) note, the effects of Dodd–Frank across community banks are not uniform. Community banks with < $200 million in assets were far more likely to reduce or altogether discontinue offering residential mortgages because of the new regulatory requirements. These banks were also far less likely to hire in-house legal counsel or compliance personnel than their larger counterparts. Lux and Greene (2016) argue the cumulative effects of regulation have driven small banks out of business and accelerated consolidation in the financial sector.

  5. Available online at https://cdr.ffiec.gov/public/PWS/DownloadBulkData.aspx.

  6. The category “other noninterest expenses” is calculated as total noninterest expenses less salaries and employee benefits, expenses of premises and fixed assets, and impairments to goodwill and intangible assets.

  7. Available online at https://research.stlouisfed.org/fred2/.

  8. McLaughlin and Greene (2013) argue that the declines in the late 1990s are only decreases in the measured number of regulations due to consolidation of the text of the regulations and do not represent actual decreases in the number of restrictions applied to US banks. “Without this consolidation, Title 12 pages would have increased.”

  9. Because a 2006 change in the Y-9C reports altered the number of reporting banks, the figure includes only banks with data before and after the change. As discussed in Sect. 4, this reporting change does not affect our results.

  10. One might argue that the pre-2005 trend would be a more appropriate baseline since it would exclude the years of the financial crisis. Our robustness analysis considers several trends. All results are similar to the base case.

  11. For our quantitative analysis, we categorize a bank as “large” if total assets is ≥ $10 billion. In practice, however, the “or equal to” phrase is irrelevant since there are no observations in our sample with total assets exactly equal to $10 billion. We therefore commonly describe these categories as large banks with total assets > $10 billion and small banks with total assets < $10 billion.

  12. Results from these regressions are available from the authors upon request or online at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2832288.

References

  • Al-Ubaydli, O., & McLaughlin, P. A. (2017). RegData: A numerical database on industry-specific regulations for all United States industries and federal regulations, 1997–2012. Regulation and Governance, 11, 109–123.

    Article  Google Scholar 

  • American Bankers Association. (2012). Dodd–Frank and community banks: Your guide to 12 critical issues. Washington, DC: American Bankers Association.

    Google Scholar 

  • Bender, M. C., & Paletta, D. (2017, February 3). Donald trump plans to undo Dodd–Frank Law, fiduciary rule: White House adviser Gary Cohn says banks burdened by rules added after financial crisis. The Wall Street Journal.

  • Board of Governors. (2013). Dodd–Frank Act stress test 2013: supervisory stress test methodology and results. Washington DC: Federal Reserve System.

    Google Scholar 

  • Calabria, M. A. (2009). Did deregulation cause the financial crisis? Cato Policy Report 31(4), 1–8. Washington D.C.: The Cato Institute.

  • Conference of State Bank Supervisors. (2014). Community banking in the 21st century: Opportunities, challenges, and perspectives. Federal Reserve and the Conference of State Bank Supervisors.

  • Department of the Treasury. (2017). The Dodd–Frank act: Reforming wall street and protecting main street. Washington, DC: U.S. Department of the Treasury. January 2017.

  • DeYoung, R., Hunter, W. C., & Udell, G. F. (2004). The past, present, and probable future for community banks. Journal of Financial Services Research, 25(2–3), 85–133.

    Article  Google Scholar 

  • Federal Deposit Insurance Corporation. (2012). FDIC community banking study. Washington DC: Federal Deposit Insurance Corporation.

    Google Scholar 

  • Federal Reserve Bank of St. Louis. (2018). Compliance costs, economies of scale and compliance performance: Evidence from a survey of community banks. St. Louis.

  • Government Accountability Office. (2015). Dodd–Frank regulations: Impacts on community banks, credit unions and systemically important institutions. Washington DC: Government Accountability Office.

    Google Scholar 

  • Grant, W. (2012). Testimony before the subcommittee on financial institutions and consumer credit of the committee on financial services United States house of representatives. Congressional Testimony. American Bankers Association.

  • Hartley, J. (2015, March 13). Fed Should stop the stress test guessing game. American Banker.

  • LaCarpa, L. T. (2015, June 11). Banks are not getting much use out of U.S. stress tests—Survey. Reuters.

  • LaCarpa, L. T., & Henry, D. (2013, September 12). JPMorgan to spend $4 billion on compliance and risk controls: WSJ. Reuters.

  • Lux, M., & Greene, R. (2015, Feburary). The state and fate of community banking. M-RCBG Associate Working Paper Series No. 37.

  • Lux, M., & Greene, R. (2016, April 14). Dodd–Frank is hurting community banks. The New York Times. http://www.nytimes.com/roomfordebate/2016/04/14/has-dodd-frank-eliminated-the-dangers-in-the-banking-system/dodd-frank-is-hurting-community-banks. Accessed 14 March 2019.

  • McCord, R., & Prescott, E. S. (2014). The financial crisis, the collapse of the banking industry, and changes in the size and distribution of banks. Economic Quarterly, 100(1), 23–50.

    Google Scholar 

  • McLaughlin, P. & Greene, R. (2013, July 19) Did deregulation cause the financial crisis? Examining a common justification for Dodd–Frank. https://www.mercatus.org/publication/did-deregulation-cause-financial-crisis-examining-common-justification-dodd-frank. Accessed 14 March 2019.

  • McLaughlin, P., Reese, C., & Sherouse, O. (2016, February 4). Dodd–Frank and the federal reserve’s regulations. http://mercatus.org/publication/dodd-frank-and-federal-reserve-s-regulations?utm_source=Email&utm_medium=newsletter&utm_campaign=FMWG. Accessed 14 March 2019.

  • McLaughlin, P., & Sherouse, O. (2015, July 20). The Dodd–Frank wall street reform and consumer protection act may be the biggest law ever. https://www.mercatus.org/publication/dodd-frank-wall-street-reform-and-consumer-protection-act-may-be-biggest-law-ever. Accessed 14 March 2019.

  • Patel, S. S. (2014, July 14). Citi will have almost 30,000 employees in compliance by year-end. MarketWatch.

  • Peirce, H., & Broughel, J. (2012). Dodd–Frank: What it does and why it’s flawed. Arlington, VA: Mercatus Center.

    Google Scholar 

  • Peirce, H., Robinson, I., & Stratmann, T. (2014). How are small banks faring under Dodd–Frank? Mercatus Working Paper.

  • Rubinstein, S. (2012). Putting banks to the (stress) test. Region Focus, 16(4), 6–8.

    Google Scholar 

  • Shane, S. (2013, September 13). Collateral damage for small business credit. Bloomberg Businessweek.

  • Sterngold, J. (2015, March 9). Fed broadens scope of stress tests. The Wall Street Journal.

  • Tracy, R. (2016, June 28). Stress test Inc.: Billions of dollars, bank consultants to manage other consultants. The Wall Street Journal.

Download references

Acknowledgements

For helpful comments and suggestions, the authors thank Nicholas Cachanosky, Robert DeYoung, Joshua Hendrickson, Travis Hill, W. Douglas McMillin, Neil R. Meredith, two anonymous reviewers, and session participants at the Southern Economic Association annual conference and the Research Seminar on Financial Markets Regulation by the Institute of Humane Studies and the Mercatus Center.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Thomas L. Hogan.

Additional information

Publisher’s Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Thomas Hogan was serving as the Chief Economist for the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Hogan, T.L., Burns, S. Has Dodd–Frank affected bank expenses?. J Regul Econ 55, 214–236 (2019). https://doi.org/10.1007/s11149-019-09379-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11149-019-09379-8

Keywords

  • Dodd–Frank
  • Bank expenses
  • Regulation
  • Compliance
  • Federal reserve

JEL Classification

  • E58
  • G21
  • G28