WASHINGTON — In a rare public exchange in June 2011, Jamie Dimon asked then Federal Reserve Board Chairman Ben Bernanke what the total economic costs of the year-old Dodd-Frank Act would be.

"Has anyone looked at the cumulative effect of all these regulations, and could they be the reason it's taking so long for credit and jobs to come back?" the head of JPMorgan Chase said.

In a moment of candor, Bernanke said he couldn't "pretend" to know if anyone was aware of what the right balance of regulation and capital ought to be, saying that the Fed's aim was to prevent future crises while encouraging lending by banks.

As the regulatory reform law turns four on July 21, Dimon's question remains unanswered, despite being a recurring concern raised by the financial industry and many Republican lawmakers.

"Jamie Dimon was so criticized for asking that question directly to Chairman Ben Bernanke," said H. Rodgin Cohen, a partner at Sullivan & Cromwell and a leading banking lawyer. "That was not a loaded question. He wasn't saying, 'It was horrible.' He was saying, 'Has anybody looked at it?' — which is a very legitimate question. I don't think anybody can say they have answered that question."

More than three years later, the question has become a rallying cry by the industry as it attempts to obtain data that can help to explain the impact hundreds of new regulations have had on credit availability, job growth and the broader U.S. economy.

The call for better data is to assess the repercussions on the banking industry, but also on the economy more broadly, especially costs that are passed onto individual customers.

"We need to think about what the costs are not in terms of the banks, but in terms of the banks' customers," said Steven Strongin, head of global investment research at Goldman Sachs, speaking at a conference last month while outlining his findings in a recent study.

The new rules have made it more expensive for those seeking banking services, especially individuals who are poorer, he said. His research detailed changes in the cost of lending across 12 key markets from subprime residential mortgage credit to large high-yield corporate lending.

What the study yielded was clear: The trickle-down cost of bank regulation was higher for those in a lower income bracket, drawing roughly $300 — or one week's salary — from an individual paycheck, not a "nontrivial cost," he said. "That's a real impact on those people and that's for people who have access to credit."

It's an argument most economists agree with, said Patrick Parkinson, former director of the Fed's division on banking and supervision and now a managing director at Promontory Financial Group.

"Some portion of the regulatory cost is going to be passed on to the customers, and those most likely to be affected are those that are most dependent on banks for financial services," said Parkinson.

Strongin's study also looked at businesses, which showed that the disparity was even greater between large and small and midsize firms by roughly 100 basis points.

While large firms have had a better than average recovery, he argued smaller firms have had a much worse average recovery. It's no wonder unemployment, which now stands at 6.3%, has been lagging, he argued. It's the smaller firms that hire more in the domestic economy than larger firms, and most of the economic growth has moved into larger firms.

"Effectively what you have done with bank regulation is you're reshaping the structure and contours of the U.S. economy," said Strongin. "We are moving competitiveness into the larger public issuing firms. We are removing competitiveness from small and medium-sized business firms — and there's a real consequence to that."

Strongin's research echoes a worry that Dimon relayed three years earlier to Bernanke: "I have a great fear that somebody will write a book that the things we did in the crisis will slow down the recovery."

Strongin has recommended that policymakers and the industry be more forward-looking by examining the potential impact regulation will have over the next 10 years. How, he asks, will it change the shape of the U.S. economy? What jobs will be lost by changes in corporate structure? Will those individuals with low FICO scores someday be paying two weeks' worth of wages to cover the expense of bank regulation?

"We can think about the underlying economics in a constructive way and begin to actually calibrate whether we have gone too far, and whether regulation is actually where it should be," said Strongin. "Yes, a lot of progress has been made, but it's beginning to be time to look at the price, and that requires really thinking hard about metrics."

Banking experts agree the moment has come for "nonjudgmental analysis" to evaluate the impact of the regulatory reform law.

"I think it's probably time to start shifting to a data-driven analysis of the output of this new regulatory system," said Margaret Tahyar, a partner at Davis Polk & Wardwell. "It's four years on and we have enough to look at to say, 'What markets are being affected? What markets have changed? Who's not getting access to credit? Who's getting credit and at what price?' "

The absence of data has left a vacuum for numerous stakeholders to air — often loudly — their own views, while asserting their own presumptive consequences and facts about what the impact has been and will continue to be.

"There are a lot of people with a lot of agendas making a lot of assertions about what these regulatory outputs will do, but there are not a lot of people taking the time to dive deep into the facts to see what's actually happened," said Tahyar.

For their part, regulators so far have relied on a cost-benefit analysis undertaken by the Basel Committee on Banking Supervision, which showed that although there were costs associated with the new regulations, the benefits of a far more resilient banking system outweighed any impact on the economy.

"While there may be some impact in terms of raising the cost of capital, the overall impact that these studies found is that reducing the odds of a financial crisis would be the most important benefit," Fed Chair Janet Yellen said at a hearing before the House Financial Services Committee in February. "The regulatory agenda of trying to strengthen the financial system, which we're trying to put into place to make it more resilient and reduce systemic risk, will bring important long-term benefits to the economy."

To be sure, observers acknowledge the difficulty in teasing out the impact regulation has on the economy as opposed to other factors, or how much more robust loan growth could be, for example, if new rules were not in place. Still, they argue that should not be an excuse against collecting observable data.

"It's a difficult exercise to quantify the impact of regulation," said Bob Chakravorti, managing director and chief economist at The Clearing House. "It would be nice to be able to clearly quantify the cumulative impact of different regulations prior to implementation. But sometimes these regulations work in tandem or slightly against each other, and to sort out how the set of regulations impact a bank's balance sheet is something we can observe only after the regulations have been implemented for some time. In other words, it wasn't something we could do when the regulations were proposed."

Conducting such research almost always presents an inherent conflict for policymakers. Many are reluctant to study their own regulations after the fact due to time and budget constraints and a reluctance to revisit past decisions, particularly given other mandates they may face.

Yet many observers ask: how can regulators and Congress set policy without knowing what the impact is?

"If you're making policy, one would want to be informed," said Cohen. "It is more than just the cost to the industry. These various crosscurrents are actually putting pressure on liquidity, and some of them are putting pressure on the dollar as the world's reserve currency. These are the types of policy issues that are really important."

There is a distinction between calls for cost-benefit analysis and the more detailed metrics that Strongin and others are seeking. Experts agree there are weaknesses to cost-benefit analysis that do little to show conclusively the impact of any regulation.

"A cost-benefit analysis is an important element of decision-making," said Parkinson. "But as a practical matter, it's hard to quantify the benefits and it's hard to quantify the costs. Often the analysis doesn't provide as much insight as you'd like."

Two papers by Jeffrey Gordon, a law professor at Columbia University and John Coates, a law and economics professor at Harvard University, also strongly support that claim.

But the biggest argument against collecting more detailed metrics is the potential for critics of the reform law to build a case for a rollback by claiming new requirements are ill-advised or have unintended effects. Yet observers argue that a failure to compile data because of a fear that changes may be necessary hampers policymaking.

"Whether you think Dodd-Frank and Basel III are good things or bad things, you should be supportive of a research to assess what the effects are," said Parkinson. "These are very significant changes in regulation that do have potential to impact the cost and availability of credit and ultimately economic growth."

Some experts suggest the Office of Financial Research — or even the Federal Reserve — would be the right institution to conduct data-driven research on such pertinent questions. "This is more economist work, rather than advocacy work," said Tahyar.

If that doesn't happen, observers suggest there could be a cost to job creation and a lack of understanding of how capital and credit is being allocated in society.

"There are at least two potential harms of setting up a massive new regulatory structure without sufficient empirical analysis," said Chakravorti. "One potential harm is the regulations do not address the current and future fragilities in the system. The second is that the pendulum has swung too far and you risk allowing regulation to choke off economic growth at the benefit of a relatively small increase in financial stability. We need to keep collecting the data and start comparing these things in order to ensure we are achieving the desired outcome of a safer sounder financial system."


Donna Borak is the Federal Reserve reporter for American Banker.


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