[Noozhawk’s note: An earlier version of this article misstated an estimate of the number of banks in the United States by 2020. The story has been updated below.]
Bank officials, customers and even economic experts remain unsure of how new federal regulations will shape the way financial institutions do business this year.
That’s ironic, considering that the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in July 2010 to reassure consumers, investors and businesses by increasing oversight of financial institutions to prevent future taxpayer-funded bailouts.
Uncertainty surrounds the law and its 2,000-plus pages of rules, some of which go into effect next month and others that haven’t been written or released yet.
The Dodd-Frank law was passed in response to the 2008 recession, and it was touted as bringing the most significant changes to financial regulation since the reform that followed the Great Depression.
With overarching reach, the law creates a batch of new agencies and removes others in an attempt to promote transparency and streamline how financial institutions do business.
Exactly how banks will be affected depends on their size and holdings.
Most with knowledge of the law say the rules are causing a lot more work for banks of every size, all clamoring and paying out big bucks for compliance.
Montecito Bank & Trust president and CEO Janet Garufis said a team of employees has been working through the new rules for months so they can try to get relevant information out to customers as soon as they figure out the effects.
“We don’t even know what the rules are going to be,” Garufis told Noozhawk. “They have yet to implement really half of it.”
Of an anticipated more than 400 total regulations, she said, just 237 rules were finalized as of December. A third hadn’t been proposed yet, she added.
Although Montecito Bank and many others aren’t sure of the law’s impact, Garufis said she expects her privately held institution will be affected by 150 or more new rules in the coming months.
Key areas will be in mortgage lending, consumer protection and banking regulation that could change core-processing systems, she said.
Other rules involve the amount customers can be overdrawn from checking accounts and stricter, higher credit and capital requirements.
“Because this was done with such haste in response to the recessionary environment and all the banks that had failed ... there was not a lot of deep thought given to how these regulations would impact banks across the spectrum,” Garufis said. “We don’t all operate the same way. We don’t have the same kinds of markets.
“It’s very challenging to make a rule that fits all. When people act and react quickly, oftentimes the outcome is not as helpful as the act was supposed to be.”
An estimate Garufis has seen predicts that just 5,000 of the nation’s existing 8,000 banking charters will be open by the end of the decade because smaller banks will not have the resources to keep up with the quick turnaround that compliance requires.
A California Bankers Association spokeswoman echoed concern about consolidation.
The release of highly anticipated mortgage-lending regulations, which has been delayed, could come as early as next week, said CBA spokeswoman Beth Mills.
“It’s a shift I think for the way mortgages are made,” Mills said. “There is kind of a nervousness. There is a potential that there might be some increased costs. Some is speculation, but some is rationalization. If the cost of being a bank far exceeds revenue ... it doesn’t make sense for them to be in the banking business.”
Other banking representatives contacted for this story did not wish to comment until they have a better grasp on how their institutions might be affected.
“Any time they’re going to have particular regulation ... obviously that’s going to reduce profitability of banks,” Rupert said. “In terms of consumer protection, I don’t think anyone knows the answer to that one, really. In some sense, consumers will be better protected if they’re going to get more information, etc.”
However, it seems inevitable that some extra costs could fall on consumers, Rupert said.
“It’s main driving force is trying to say there was some bad behavior going on, and we need to prevent that type of behavior,” Rupert said of the Dodd-Frank law. “It’s hard to say exactly what those things are they’re trying to stop.”
Even with uncertainty and cost, Garufis is hopeful the changes will make positive waves over time.
“When we get to the other side of it this, we will be a stronger banking system,” she said.