Capital & Credit Watch: Dodd-Frank is Suffocating Small Banks

By SBE Council at 7 March, 2014, 10:07 am

by Raymond J. Keating-

In late February, the Mercatus Center released a survey of small banks – specifically, 200 banks, each with less than $10 billion in assets, and serving rural communities and small metro areas. The focus was on the impact of Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in 2010.

Not surprisingly, the general findings were that Dodd-Frank has increased the banks’ regulatory costs.

Mercatus reported, “As of mid-November 2013, its new rulemakings had created nearly 19,000 pages of regulatory text, with approximately sixty percent of the rules still outstanding.”

Regulations are forcing small banks to close. A recent USA Today article reported on the plight of community banks and what their closure means for local communities. SBE Council’s Center for Regulatory Solutions analyzed the piece, which can be read by clicking the photo above.

So, as for the rhetoric during the debate over the legislation that small banks would not be targeted and would not suffer (along with certain accommodations made for small banks in the law), the reality is: “Despite the intentions of Dodd-Frank’s proponents and the attempts made to moderate its effect on small banks, as regulators have filled in the details of the new regulatory regime there has been a growing realization of the law’s profound effects on financial institutions of all sizes.”

Some specific findings:

• ‘[A]lmost all respondents [94%] responded that they would not add any new products as a result of Dodd-Frank.”

• As for discontinuing or anticipating discontinuation of services due to Dodd-Frank, “the largest numbers of discontinuations are residential mortgages (5.9%), mortgage servicing (5.0%), home equity lines of credit (4.5%), overdraft protection (2.7%), and credit cards (2.7%),” and “most commonly reported anticipating discontinuation of residential mortgages (10.4%), mortgage servicing (4.5%), home equity lines of credit (5.4%), and overdraft protection (5.0%).”

• “[A]pproximately ninety percent of respondents reported an increase in compliance costs, and most (82.9%) of participating banks reported that their compliance costs had increased by more than five percent.”

• “In short, small banks have materially increased their compliance departments,” with 27.4 percent saying that they planned “to hire additional compliance personnel in the next year. Given the expertise required for regulatory compliance, these positions could add significantly to small banks’ compensation costs.”

• “The Durbin Amendment directs the Board of Governors of the Federal Reserve System to establish standards for debit-card interchange transaction fees to ensure they are ‘reasonable and proportional to the cost incurred by the [debit card] issuer with respect to the transaction.’ Although Dodd-Frank exempts small bank issuers from the provision,” the survey results show “that the Durbin Amendment is having an impact on almost half [48.3%] of small banks.”

• 71% reported that their business activities have been affect by Dodd-Frank’s Consumer Financial Protection Bureau (CFPB), with 37 percent reporting that they hired “additional compliance or legal personnel specifically in response to the Bureau’s regulatory initiatives.”

What’s the overall picture of Dodd-Frank and small banks?

The authors of the report summarized: “Our initial analysis suggests that Dodd-Frank is having significant effects on small banks and their customers. A large majority of small banks view Dodd-Frank as more burdensome than the Bank Secrecy Act, a regulatory regime that banks widely regard as very burdensome. The participating banks noted their substantially increased compliance costs in the wake of Dodd-Frank. These costs include new compliance-personnel hires, increased reliance on outside compliance experts, additional resources allocated to compliance, and more time spent by noncompliance employees on compliance. An important driver of compliance expenditures is the Bureau of Consumer Financial Protection.”

That’s bad news for small banks, and therefore, for the small businesses those banks serve.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s new book, published by SBE Council, is titled Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship. It’s available from Amazon.com here.