The Dodd-Frank Act has imposed nearly 400 new regulations since its inception. This will inevitably come at a cost. It is estimated that Dodd Frank compliance across the eight largest banks costs up to $34 billion a year. In order to secure the investment required for this level of compliance, banks have had to downsize certain businesses and departments, in turn impacting their overall revenue. The dilemma of maintaining compliance whilst maintaining revenue is a work in progress. It has only been 5 years since Dodd Frank went live and financial institutions are still working through the teething problems. Moreover, with roughly one quarter of the law still to be implemented, the true economic impact will not be understood for years to come.
The Cost of Compliance
In the US, Dodd-Frank compliance has increased banks and financial services firms’ costs by:
- circa $34 billion annually across the eight largest banks alone (Standard and Poors)
- circa $103 billion in legal fees (Bloomberg)
- 60.7 million paperwork burden hours60.7 million hours is the equivalent to 30,370 employees working full-time to complete annual paperwork. These burdens are up from $15.4 billion and 50 million hours last year. However, there is an estimated 35.8 million hours of regulatory paperwork burdens that agencies have failed to calculate. 35.8 million hours is the equivalent of 1,493,462 days or 4,092 years’ worth of regulatory compliance paperwork. In economic terms, 35.8 million hours would take 17,922 officers to complete one year of paperwork (assuming each compliance officer worked 2000 hours per year).
The Volcker Rule alone has had an estimated cost of $4.3 million dollars and 2.4 million hours in paperwork. As these cost burdens increase, firms will need to balance their ability to effectively meet the compliance challenge, whilst still focusing on revenue growth. Addressing the Challenge.
From 2008 to 2014, most banks had to adjust to the regulation by investing in compliance infrastructure and improving risk governance. The increased need for effective investment decision making, compliance monitoring, and real/near time risk, financial and capital/collateral management will bring data analytics and data management to the forefront of institutions’ agendas. The continued cost pressures institutions face will drive greater collaboration and use of new financial technologies (FinTech), and industrialization of existing industry solutions. Industry initiatives where both regulators and banks agree on a common interpretation, approach and standards are critical to ensure the costs of regulatory compliance reduce.
For both regulators and banks, collaboration is key. They will need to work together to jointly find ways to drive down the costs of regulation. One major criticism of the regulation, especially the Volcker Rule, was the lack of research and cost benefit analysis before enacting rules. With a quarter of the regulation yet to be implemented, the complete cost and effects of Dodd-Frank will take years to quantify. However, there is potential to mitigate these costs as banks and regulators adjust through operational efficiencies and technological investments to ultimately reduce the overall costs of regulation.