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Has Dodd–Frank affected bank expenses?

Journal of Regulatory Economics volume 55, pages 214–236 (2019)Cite this article

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.

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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.

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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.

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Authors and Affiliations

  1. Baker Institute for Public Policy, Rice University, 6100 Main St., Houston, TX, 77005, USA

    Thomas L. Hogan

  2. Ursinus College, 601 E. Main Street, Collegeville, PA, 19426, USA

    Scott Burns

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Correspondence to Thomas L. Hogan.

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

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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

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Keywords

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

JEL Classification

  • E58
  • G21
  • G28