A recent research paper on the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 estimates that the burden of compliance costs on the banking sector will result in a reduction of nearly $900 billion in gross domestic product (GDP) and a cost of about $334.60 per year for a working-age person over the next decade.
Washington, D.C.-based non-profit think tank American Action Forum President Douglas Holtz-Eakin, former director of the Congressional Budget Office, said in his research paper titled "The Growth and Consequences of Dodd-Frank" released earlier this week that there are so many uncertainties around the act that its effect may be the opposite of what was originally intended.
"It is widely perceived that this massive regulatory initiative has generated uncertainty that has harmed lending," Holtz-Eakin said. "It is even more likely that the banking sectors response to these requirements and the burden of regulatory compliance have been an effective tax on the banking sector that has harmed lending, investment and growth. To date, however, there has been little quantitative evidence on the magnitude of these impacts."
Where the effective tax rate on the banking sector is concerned, the increase of 2 percentage points in the leverage ratio of the banking sector, from 7.5 percent to 9.5 percent) in the post-crisis years of 2008 to 2014 can be transformed into an increase in the effective tax rate for the banking sector, according to Holtz-Eakin.
"The banking sector responded to Dodd-Frank by holding more equity capital, thus require it to have greater earnings to meet the market rate of return – the same impact as raising taxes," he said. "In this case, the higher leverage ratio translates into a further increase in the effective tax rate to 40.3 percent, for a total rise of 9.2 percent."
Dodd-Frank mandated the creation of new bureaus and agencies (such as the Financial Stability Oversight Council and the Consumer Financial Protection Bureau), revamping of securitization rules, and the changes in corporate governance, capital requirements, and oversight of derivatives, which have resulted in 398 separate rulemakings that are still being finalized even five years later, Holtz-Eakin said. The impact of these changes on economic growth is drop of 0.059 percentage points annually in the per capital growth rate during the years of 2016 to 2025 – an estimated $895 billion reduction in GDP over a 10-year period from 2016 to 2025, which computes to $3,346 per working-age person (16 and older) during that decade ($334.60 per year).
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