Slideshow The real-world impact of Dodd-Frank, stress tests and other regs

Published
  • April 04 2017, 6:34pm EDT
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The pain caused by the Great Recession demanded a swift government response, but was it the right response? M&T Bank Chairman and CEO Robert Wilmers says it may have been at the time, but in his annual letter to shareholders he laid out in compelling detail how government policies intended to protect American families have ultimately stymied economic growth. Here’s a by-the-numbers look at the impact he says excessive regulation has had on M&T, the industry at large and the broader economy.

Killer compliance costs

"Regional banks are penalized at the starting line, paying dearly to try to narrow the gap but not always succeeding," Wilmers wrote. "At M&T, our own estimated cost of complying with regulation has increased from $90 million in 2010 to $440 million in 2016, representing nearly 15% of our total operating expenses."

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The toll on human capital

Wilmers said in his letter that M&T staffers have logged “tens of thousands of hours” preparing for examinations from an “expanding roster” of regulators. “During 2016, M&T faced 27 different examinations from six regulatory agencies,” he wrote. “Examinations were ongoing during 50 of the 52 weeks…with as many as six exams occurring simultaneously. In advance of these reviews, M&T received more than 1,200 distinct requests for information, and provided more than 225,000 pages of documentation. The onsite visits were accompanied by an additional, often duplicative, 2,500 requests that required more than 100,000 pages to fulfill — a level of industry that, beyond being exhausting, inhibits our ability to invest in our franchise and meet the needs of our customers.”

Not just a bank problem

Businesses of all stripes are dealing with a flood of new regulations. New rules that took effect in 2015 alone added some $23 billion to the private sector’s annual compliance costs while new rules enacted since 2009 have cost firms some $108 billion, or fully 0.6% of U.S. gross domestic product, Wilmers noted. “The scope of regulation facing the businesses we serve has dampened and diverted their energies,” he wrote. “It is very much uncertain whether the benefits of the ever-growing volume of regulation outweigh its drag on economic growth.”

Stressed-out small businesses, part one

M&T surveyed its small and midsize business clients and found that their biggest worry was not the stagnant economy, the cost of materials or the pressure of competition, but rather the burden of government regulation. Fifty-five percent cited the cost of employee healthcare benefits as their greatest hurdle, while 36% cited the challenge of complying with government regulation. “To underscore: notwithstanding the slow-growth environment of the post-recession economy, our own business clients view regulation as a greater concern than sales growth, the lifeblood of any business,” Wilmers wrote.

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Stressed-out small businesses, part two

Stress-testing models are forcing regional banks “to deploy a cold and calculated rubric that fails to comprehensively evaluate the ineffable quality of loans they make to small businesses,” Wilmers wrote. He pointed to a recent study to illustrate what he called a “distortion of capital.” The study suggests that, in the context of the stress test, banks must effectively hold as much as 140% more capital for a small business loan than for a loan to a larger firm. “The effect,” Wilmers wrote, “was all but inevitable: small-business loan originations by regional banks subject to the stress test have not grown at all since 2009.”

Losing ground in mortgages

Wilmers wrote that the “arbitrary nature” of regulation has given a distinct advantage to nonbank lenders that have “capitalized fully on the cost advantage resulting from their lesser regulatory burden.” A case in point is in the mortgage business where, as Wilmers noted, nonbanks now originate more than half of new U.S. residential mortgage loans, compared to just 9% seven years ago.

Awash in deposits that banks can't deploy

“Heightened liquidity requirements have constrained deployment of capital that might otherwise help expand the economy,” Wilmers wrote. To illustrate his point, Wilmers said that of the $733 billion of deposits M&T and 10 of its regional peers have taken in over the past decade, $308 billion, or more than 42%, were diverted to purchase securities such as government bonds or simply stored at the Federal Reserve. “Banks are effectively mandated to use deposits to fund the needs of government rather than those of businesses and consumers,” he wrote. “Banks typically prefer to use the vast majority of the deposits they gather to support new loan growth.”