It’s well known that repealing or replacing the Dodd-Frank Act is a top priority on the new presidential administration’s regulatory “to-do” list. But even though the law’s ultimate fate is uncertain, the need to comply with its requirements led financial institutions to make changes in their technology platforms, systems, and processes that actually may present significant, ongoing business opportunities.
It will be important, in responding to any changes in Dodd-Frank, not to throw out the “baby” (beneficial systems and structures) with the “bath water” (regulatory burdens). In this regard, here are some elements of Dodd-Frank compliance that may produce positive, albeit unintended, consequences for financial institutions.
In response to anti-money-laundering (AML) and know-your-customer (KYC) requirements, institutions have had to create robust systems to collect, analyze, and report information about customer activity across diverse business lines.
The intent of the AML and KYC rules was to identify and prevent possible criminal or terrorist activity. However, the implementation of new systems and processes now makes it simpler for a bank to get a comprehensive view of customers whose banking relationships span multiple areas, such as deposits, mortgages, credit cards, commercial lending, corporate banking, etc.
Most financial institutions today are trying to determine how to gather and utilize “big data” to serve their clients better and drive revenues. The revenue-generating side of such institutions might be surprised to learn that the compliance team may already have a system in place that addresses a major part of the challenge of developing a comprehensive view of customers.
Another focus of Dodd-Frank was strengthening suitability and fiduciary standards for investors and customers of financial institutions. Even if the relevant provisions of law that relate to the suitability of financial products are repealed or relaxed, institutions now have systems that allow them to know much more about their customers’ individual risk tolerances than ever before.
Using the information gleaned from these systems could help institutions design more appropriate — and hence better-performing — products and services.
Another flashpoint for Dodd-Frank’s critics has been the law’s stringent capital, liquidity, and risk-management standards, embodied in the Comprehensive Capital Analysis and Review (CCAR), the Liquidity Coverage Ratio (LCR), and the overall concept of Systemically Important Financial Institutions (SIFI) that are “too big to fail.”
There is an argument that easing these standards could free up funds for lending and investment, while allowing financial institutions to deploy assets in a more profitable manner.
Take the LCR requirement as an example. Because of Dodd-Frank, banks now have more sophisticated systems for measuring, planning, and managing liquidity. They can detect and model how liquidity is allocated across various geographies and business entities.
While such systems were created in response to a regulatory imperative, they have practical business applications — providing the bank with information it can use to reduce trapped pools of liquidity and reallocate that liquidity where it’s most needed. The profit impact of employing liquidity more productively could be significant.
The notion that “forced” system improvements needed to comply with Dodd-Frank might yield unexpected business benefits has an analogy in the lead-up to Y2K.
Fearing that the so-called Y2K computer glitch would produce global chaos, IT departments around the world made substantial investments to upgrade or replace systems — investments that might otherwise have been deferred for years. Even though the new systems were justified by economics and were valuable in supporting the changing needs of the business, it took the extra prodding of Y2K to spur many management teams to action.
So it is with Dodd-Frank: systems and processes required to meet AML/KYC or capital/liquidity rules may ultimately enable stronger customer relationships or better liquidity management.
Even if a relaxation of Dodd-Frank rules leads to reduced compliance costs or more productive allocation of capital and liquidity, financial institutions would do well to find new business-centric applications for the technology, system, and process investments for which Dodd-Frank was the impetus.
Mallinath Sengupta is CEO of NextAngles, a provider of artificial intelligence-based regulatory compliance technology for banks.