Where have all the small banks gone?

Eight years ago, employment numbers were in freefall. The housing bubble burst, and Americans witnessed the federal takeover of mortgage giants Fannie Mae and Freddie Mac, the collapse of the financial services firm Lehman Brothers, and the bailout of insurer AIG. 

The coming recession would only get worse, Congress thought it could fix this mess with legislation, and so in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was born. Now, six years into its existence, this federal banking and finance law has proven harmful to consumer banking and the Americans who depend on it.

{mosads}The law has applied a one-size-fits-all set of rules and regulations for all banks – irrespective of a bank’s size or risk appetite. While big banks have largely adapted, thanks to the lawyers and accountants they can afford to retain, small banks are disappearing.

Many small community banks are being forced to shut down or consolidate with their larger competitors, depriving many communities of a valuable service. Small community banks provide services for individuals and small businesses that many large banks don’t, such as small business loans, residential mortgages and agricultural-related loans.

Unfortunately for these often underserved businesses, such as family farms and businesses, their daily operations are now more costly and their growth is stifled due to Dodd-Frank.

To see how, one needs to look no further than the Peach State. As House Financial Services Committee member Lynn Westmoreland (R-Ga.) points out, “Dodd-Frank was a knee-jerk reaction to our nation’s financial problems, and it’s only made it harder for Georgia’s community banks to recover.” Since Dodd-Frank was signed into law in July 2010, Georgia has seen 51 community banks close their doors – far outpacing all other states.

Not that small banks in other states have it much better. Research from Harvard’s Kennedy School reveals that community banks across the country have been on the decline since Dodd-Frank came into effect. Their loss of market share almost doubled from a 6 percent decline observed between 2006-2010, to a nearly 12 percent decline between 2010 and 2014.

Small banks have seen their market share slide because compliance with Dodd-Frank is so costly. When 974 small bankers were sampled last year, they estimated that in compliance costs between 2012 and then had reached around $4.5 billion, or 22 percent of their bottom line.

Similarly, the Banking Compliance Index shows for the first half of 2016 the average community bank needed to hire at least two additional employees to cover the 875 additional hours of annual labor required to meet Dodd-Frank’s cumbersome regulations. Money that would have once been loaned to a local entrepreneur or family farm is now being swallowed up by more bureaucratic rigmarole.

With such a high price tag for basic compliance, no wonder so few new community banks are getting off the ground.

According to recent testimony provided by FDIC chairman Martin Gruenberg, only three applications for ‘de novo,’ or new banks have been approved since 2009. These banks usually represent local institutions, who must build their customer base from scratch. Starting a new bank is estimated to cost $20 to $30 million in capital alone, according to testimony from the American Bankers Association. The aspiring bank must also present a business plan to regulators.

These top-down demands can trap local banks, preventing them from adjusting to changing markets. Known as a “penalty box,” new banks are required to adhere strictly to their three-year plans, recently revised down from seven years in April. Even when changes in the marketplace necessitate adjustments to a bank’s business plan, it’s nearly impossible to make the necessary shifts without facing penalties from regulators.

Recognizing how onerous these new regulations are, Dodd-Frank must be overhauled. In order to reverse crippling effects of this law that are choking local enterprise and enabling big banks to get bigger, the FDIC should be able to tailor regulations to the size and risk of the bank, rather than the current one-size-fits-all approach.

Until such reforms take place, small banks have few choices. Without changes to Dodd-Frank, local residents and small businesses on Main Street will continue to be crushed by regulations meant for Wall Street.


James Setterlund is federal affairs coordinator at Americans for Prosperity.

The views expressed by authors are their own and not the views of The Hill.