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The Dodd-Frank era: Five years and counting

Five years ago this month, the Dodd-Frank Wall Street Reform and Consumer Protection Act was approved by Congress and signed into law by President Barack Obama as a response to the 2008-09 financial institutions’ bailout. Since that time, thousands of pages of new banking regulations have been written, with more yet to come.

Over the last few weeks, the following questions have been asked to members of Congress, the president, Federal Reserve members, and even former Sen. Chris Dodd and former Congressman Barney Frank, all with a common response:

Is Dodd-Frank here to stay? “Yes.”

Is “too big to fail” still a concern? “Yes.”

Are there still more regulations to come? “Yes.”

Is the banking system safer than it was in 2008? “Yes.”

To signal that its work is still not complete, the Fed sent a powerful message to the top-tier banks: Either shrink your bank, or face an additional level of capital requirements that will come at a significant cost to the bottom line.

The ability for the large banks to produce higher returns may prove to be a difficult task, especially given lower net interest margins in the low interest rate environment. The Fed wants action now, and its patience is running out.

Given the current impact of Dodd-Frank and the promise of future regulations, here are the trends I see developing in the marketplace:

  •  The top 10 banks will downsize their business and serve only those core clients with the highest profit margins. The focus will be on big clients that drive large and frequent transactions. This will dramatically decrease the value of deposits.
  •  Approximately $2 trillion in bank deposits will be in motion, moving out of the big banks to either spun-off entities, or regional and community banks. Where banks cannot accept additional deposits, off-balance-sheet investing will become the norm with the help of highly skilled registered investment advisors.
  •  Private equity will fill the lending gap for startups, small and medium-size businesses if banks pull back on lending due to internal risk controls and federal capital requirements.
  •  If an entity handles a lot of cash, they will have a difficult time finding a bank that will want their business given heightened regulations around cash transactions. The use of cash and checks will be reduced significantly by 2018 through Fed design.
  •  Community banks with assets of $5 billion to $10 billion will be considered a “sweet spot” in banking. There will also be increased consolidation of community banks with assets of $250 million to $1 billion.
  •  Regional banks with assets of $50 billion to $250 billion will struggle with the same regulations facing the top 10 U.S. banks. Similar to the biggest banks, they will be very selective with whom they serve and will seek an “all or nothing” banking relationship with potential clients.

What does this all mean for a public entity or a higher education institution? Expect the following:

  •  Tighter banking controls;
  •  Increasing and more detailed requests from your bank(s) for information regarding your organization under new Know Your Customer requirements;
  •  An accelerated shift from cash and check transactions to electronic banking services;
  •  Decreased banking deposit options and availability;
  •  Increased usage of off-balance-sheet investing options; and
  •  More localized banking.

Clearly, the way one banks and with whom is changing. The foundation of the banking system as a whole is much safer, but it is still critical to understand that significant shifts are occurring within the industry. The sooner your organization anticipates and adjusts to these new dynamics, the lesser the pain and stress will be.

Joseph Rulison is CEO and co-founder of Three + One Co. LLC.

7/24/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email


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