Bank compliance costs jumped more than $50B a year after Dodd-Frank Act

The Dodd-Frank Act roughly doubled the number of regulations applied to U.S. banks, which hiked their compliance costs by more than $50 billion per year, according to an expert at Rice’s Baker Institute for Public Policy.

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Thomas Hogan, a fellow in public finance, outlined his insights in a new issue brief, “Costs of Compliance with the Dodd-Frank Act.”

In the wake of the 2008 financial crisis, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (better known as the “Dodd-Frank Act”). The act was intended to reduce risk-taking by the largest banks to prevent another financial crisis. But many of the regulations either were unfairly applied to small banks or had other unintended consequences, Hogan said.

Every year since, Congress has proposed and debated bills to reform the Dodd-Frank Act. “One of the most important questions in those debates is if, and to what degree, Dodd-Frank increased the costs of regulatory compliance for U.S. banks,” he wrote.

In a recent paper, Hogan and coauthor Scott Burns estimated the effects of the Dodd-Frank Act on U.S. bank expenses. “Banks experienced a one-time increase in non-salary expenses, while their salary expenses increased in proportion to new regulations,” Hogan wrote. “Small banks experienced disproportionate increases in salary expenses as well as significant increases in auditing, consulting, data processing and legal fees.”

Regulatory costs typically affect banks’ noninterest expenses, such as hiring new compliance officers or bringing in outside lawyers or consultants. Hogan and Burns’ analysis finds that total noninterest expenses in the banking system increased after 2010 by an estimated $64.5 billion per year, ranging from a low-end estimated increase of $58.7 billion to a high-end estimate of $86.1 billion per year.

In the non-salary expense categories, the researchers found large banks spent an additional $12.42 billion per year on legal fees and $7.04 billion on data processing relative to before the Dodd-Frank Act.

Small banks experienced statistically significant increases after Dodd-Frank in all categories of non-salary expenses, the researchers found. They spent almost $1 billion more per year on legal fees, Hogan and Burns concluded. Small banks also increased annual spending on data processing, auditing and consulting by roughly $310 million, $70 million and $110 million, respectively, and they spent an additional $3.85 billion per year on other non-salary expenses relative to before Dodd-Frank. Compared to large banks, increases in small banks’ non-salary expenses were bigger and more likely to be statistically significant.

“U.S. regulators and policymakers may wish to consider these results when developing future regulatory policies,” Hogan concluded.

Hogan was formerly the chief economist for the U.S. Senate Committee on Banking, Housing and Urban Affairs. His primary research interests include banking regulation and monetary policy.