When President Barack Obama signed the Dodd-Frank financial reform bill into law three years ago, he promised it would encourage healthy change and competition.
"This reform will help foster innovation, not hamper it. It is designed to make sure that everybody follows the same set of rules, so that firms compete on price and quality, not on tricks and not on traps," Obama said.
How is that working out? It turn out that in the view of the head of one of the biggest banks in the United States, Dodd-Frank is helping the big banks by making the cost of regulatory compliance so high that smaller rivals cannot compete.
He even pointed out that while margins may come down, market share may increase due to a "bigger moat" -- We were surprised that regulatory risk was not mentioned as one of the key risks. In Dimon's eyes, higher capital rules, Volcker, and OTC derivative reforms longer-term make it more expensive and tend to make it tougher for smaller players to enter the market, effectively widening JPM's "moat." While there will be some drags on profitability – as prices and margins narrow, efficient scale players like JPM should eventually be able to gain market share.
In other words, Dodd-Frank is good for JPMorgan and bad for smaller competitors. The rule that "everyone follows" is just this: Get bigger.
This will surprise a lot of people — but it shouldn't. As a Washington Examiner blog explained, there are many, many examples of regulation helping bigger business and discouraging competition.
Regulatory complexity increases the cost of compliance, which discourages new entrants and rewards firms big enough to hire armies of lawyers. Thus it has ever been, thus it shall ever be.
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