M Business 5th Edition by Ferrell,Geoffrey Hirt,Linda Ferrell

Exercise 5

The Dodd-Frank Act of 2010, enacted in response to the financial crisis, imposed many new regulations on large financial institutions in the United States. For major banks, these include strict capital retention requirements, many new regulatory charges, and a complex and involved yearly "stress test" by the Federal Reserve. These regulations are meant to provide oversight and tighter control over companies so "systemically important" that their failure would have a significant impact on the financial system as a whole. Under the law, all banks with assets over $50 billion are considered systemically important and subject to the tighter regulations. Although $50 billion sounds like a large amount, it is relatively unremarkable by large banking standards. Consider that the four biggest banking institutions are at well over $1.5 trillion in assets each. This has led some policymakers to argue that the law's threshold is far too low, encompassing banks whose failure would have little to no systemic impact. This is problematic for both the banks, who have to spend significant amounts to comply with the regulations, and the regulators, whose attention is diverted to less important companies rather than the ones they should be focusing on. The law is also having unexpected practical effects. Banks whose assets are approaching $50 billion are restraining their own growth to avoid going over, preferring to wait for a very large deal or set of deals-say $30 million or more-that would make "crossing the line" worth it. Congress is expected to soon revisit the $50 billion threshold and consider whether it should be raised or even replaced with a different standard, such as guidelines for a caseby- case analysis of whether an institution is systemically important. 9
What does this situation tell you about the effect of legal changes on business decisions and strategies?