As legislation revamping federal financial regulation goes on the books, attention will turn to the Federal Reserve, Treasury Dept. and other agencies that will draft rules fleshing out how the mammoth measure will be implemented. Construction will watch whether banks react to the bill’s increased regulation and higher fees by tightening up on credit.
Lenders’ responses may vary. The legislation sets tougher restrictions on big money-center banks than it does on smaller, community banks, which are important credit sources for the highly regionalized construction industry.
The bill, named for its main authors, Sen. Christopher J. Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.), cleared its final congressional hurdle on July 15, when the Senate approved it on a 60-39 vote, generally along party lines. President Obama has signed the bill on July 21.
The impact of Dodd-Frank on credit and other financial activities will not be felt right away. Robert A. Murray, McGraw-Hill Construction vice president for economic affairs, says, “Just how stringent the regulations turn out to be is still to be determined and will likely take a few years.” He observes, “Lending conditions are already very tight, and given such weak market fundamentals as vacancies and rents, not much lending for commercial building was going to take place this year anyway.”
American Bankers Association President and CEO Edward L. Yingling predicts there will be “years of uncertainty as to what the massive new rules will mean.” He warns that the bill will, “by extension, have a considerable impact on the broader economy and the capability of traditional banks to provide the credit needed to create jobs and drive economic growth.”
However, Dodd says, “I think the arguments about the shrinking of credit availability are hyperbole.” He says the bill will benefit smaller banks based in regional markets. Speaking to reporters after the Senate vote, Dodd said community banks “are in better shape at this very hour than they were an hour ago because of what’s in this legislation.”
Those roughly 7,000 banks, the assets of which are generally less than $10 billion, “are prolific small-business lenders” to sectors that include construction, says Paul Merski, the Independent Community Bankers of America’s senior vice president and chief economist.
Among the bill’s provisions meant to help community banks is a change in the formula for determining banks’ payments to the federal deposit insurance fund. Merski says that provision will save community banks $4.5 billion over three years, compared with fees under the previous formula, which could allow such banks to preserve more cash flow and capital that could be used for loans.