Dodd-Frank Takes a Toll on CHROs


It's a bit hard to feel sorry for the bankers. After the industry's avarice and failure to adequately assess risk sent the economy into a funk (albeit they're not responsible for staying in the funk), one is tempted to say that they get whatever they deserve. However, after talking with a few CHROs in the industry, I'm not sure that's true, and I fear that the new constraints they're under are unnecessarily punishing both them and the economy.

I'm not an expert in the details of financial services, but I do know enough about human behavior to see a problem. Dodd-Frank ostensibly set out to prevent future financial collapses from happening through increased regulation of banking activities. However, as with any new regulation or law, banks have to spend considerable time and resources figuring out the requirements. Depending on the size and scope of the bank, they could have between 20 and 100 teams working on particular workstreams to get into compliance with the new law.

Then add in that now each bank has to identify all of the Material Risk Takers, define why they are a risk taker, develop a risk balancing compensation play, and then demonstrate how that compensation plan will work to balance risk. And, if you're a bank still under TARP, you'll probably have to hire a few people to ensure that all your transactions are done in compliance with TARP.

Again, while something needed to be done, it's unclear whether these actions will ensure that banks don't fail in the future, or end up strangling growth and innovation. Clearly there are two short term effects. CHROs are talking about the almost paralysis of leaders. They fear doing something non-compliant so there is a tendency to do nothing.

Second, the costs and headcounts have increased. The executives estimate that it's costing close to 2% of revenues to get compliant with Dodd-Frank. They suggest that they have had to increase their workforce headcounts by 10-15% with just people focused on compliance. Maybe these are the jobs politicians hoped to create!