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How Bad is Dodd-Frank for Community Banks?
August 28, 2015
Congress passed the Dodd-Frank Act in June and July 2010 with minimal Republican support, and it was signed by President Obama July 21, 2010. Since passing, Dodd-Frank has been hailed, depending on who answers, as salvation for our banking system or the death knell of community banking. The American Banker published a number of articles about this act in July 2015. Most were critical, highlighting the raised regulatory burden, which is huge. One implied the act is driving community banks to merge, quickly reducing the number of community banks and eliminating banking offices in some communities.
The evidence for the reduction of community banks is clear, but the reason is not. Phil Graham reported in The Wall Street Journal that 1,341 banks have “disappeared” since 2010, but only two new banks were chartered. Some community bank presidents claim that additional regulation pushed them to merge with larger entities, but in some cases it later appeared that loan portfolios and difficulty replacing senior management were as much the cause as regulation. In fact, branch banks and single unit banks have been losing ground consistently since 1985. The numbers of savings banks and single unit banks dropped more quickly in the late 1980s and early 1990s, due to the savings and loan crisis. Of course, there also was an increase in the number of new banks formed during the late 1980s and early 1990s, and that helped to offset some of the consolidation. We have not seen similar increases in new bank formation this cycle. Similarly, since 1994, while the top five banks lost about 4 percent of the total deposits, and the larger regional banks more than doubled their deposit percentage, community banks lost more than half of their previous 40 percent of deposits. Community banks handled 40 percent of deposits in 1994, but handle only 18 percent today. And that decreasing curve is scarily consistent. For an excellent review of these trends, “Here’s what’s going on with the Dodd-Frank Act,” CNBC, July 24, 2015. Much of these statistics and conclusions come from this interesting article. It is not clear from the statistics whether Dodd-Frank or the Recession made this fall that much greater. Why are bankers more frightened now?
I believe that what scares many bankers today is not just Dodd-Frank but the multiple straws on the camel’s back. In 26 years, banks have dealt with:
  • FIRREA (1989),
  • Crime Control Act (1990),
  • FDICIA (1991),
  • Riegle Act and Riegle-Neal Act (1994),
  • Economic Growth and Regulatory Paperwork Reduction Act (1996),
  • Gramm-Leach-Bliley Act (1999),
  • SOX (2002),
  • USA Patriot Act (2002),
  • Check Clearing for the 21st Century Act (2003),
  • FACT Act (2003),
  • FDIR Act (2003),
  • Financial Services Regulatory Relief Act (2006),
  • Housing and Economic Recovery Act (2008),
  • Emergency Economic Stabilization Act (2008),
  • Helping Families Save Their Homes Act (2009),
  • Dodd-Frank (2010), and
  • JOBS Act (2012).
Some of these acts actually were intended to help financial institutions, but those often did not help at all. Most of these acts imposed additional regulation on financial institutions. All the acts changed requirements, forcing all banks to change internal processes and learn how to deal with new examination procedures. They all posed a burden, even if sometimes well-intended. Bankers I know look at this and ask, “Will it ever stop?” Mr. Gramm also states that a recent survey found that community banks have added 50 percent more compliance officers recently, while overall industry employment is barely higher. That tells the tale.
The constant barrage of changes to regulations make running a bank a burden and effective strategic planning impossible. This is why focus on Dodd-Frank alone disturbs me. It misses the bigger point; banks need smart regulatory relief. But, amendments to Dodd-Frank would be a start. What should change first?
Ted Peters, of Bluestone Financial Institutions Fund, makes four suggestions:
  1. Tier regulation more effectively according to the size of the bank and the Camel rating. Dodd-Frank pretends to do that somewhat, but the distinctions are not effective.
  2. Allow smaller banks to file short-form call reports quarterly, with the more involved report due only at year end. The complexity of call reports increased exponentially in the past 30 years.
  3. Refine (and tier) stress test requirements for smaller institutions. Although banks under $10 billion are supposed to design their own stress tests, the process imposed on the larger banks now is treated as “industry standard” by many examiners and imposed on smaller banks. This needs to stop.
  4. Treat banks as innocent until proven guilty, especially in consumer matters. Too often, examiners take a prosecutorial position, even with the smallest banks.
I would add a fifth item to this list. After the next election cycle, Congress, in consultation with industry leaders (ABA, etc.), consumer advocates, and technology leaders, should review banking regulation holistically and start over with new, more streamlined laws. Eliminate regulation of community banks for things that almost never happen. When was the last time you heard of a community bank “redlining?” Small banks need every piece of good business that they can get. That is just an example. Technology is changing so fast that a bad loan, or even a failed bank, may cost society much less than a large financial hack. Cybersecurity needs more attention. Banking now is so much more than bricks and mortar, and our current system is not organized to address the speed of change. Even if penalties are higher for not complying with the law, if the number and effect of regulations decrease, as laws for new products and delivery methods broaden, community banks will be more efficient and effective in leading our nation out of its current doldrums, one loan at a time.

If you have any questions about Dodd-Frank, please contact us.
Community Banking Hugh B. Wellons