Thoughts & Comments
Dodd-Frank Is Good For Small Banks? Not A Chance.
Regardless of what the Treasury Department is arguing. . . .

Thomas Brown  ( about me )
Posted 10/24/2011

On his Treasury Department weblog (?!?) Deputy Treasury Secretary Neal Wolin explains the benefits Dodd-Frank provides community banks:

Wall Street Reform helps level the playing field between large banks and small ones, helping to eliminate distortions that previously favored the biggest banks that held the most risk. The Dodd-Frank Act subjects big banks to much higher standards than small banks in a number of areas:  

·         Tough new capital and liquidity requirements to reduce the risks presented by the biggest Wall Street firms do not apply to community banks. In fact, the law largely exempted about 7,000 community banks and thrift institutions, nearly all of which hold less than $10 billion in assets and a third of which hold less than $100 million, from these requirements.  

·         Wall Street Reform requires the biggest institutions to pay a larger share of the cost of deposit insurance protection, reflecting the greater risk they pose to the financial system.   

·         Wall Street Reform strengthens protections for one of community banks’ core sources of funding by raising deposit insurance protection from $100,000 to $250,000.

Wolin is being highly selective! Among the other blessings Dodd-Frank provides, he forgets to mention, for instance, the new regulatory infrastructure most small banks will have to install to carry out the 4,000 or so pages of new rules the law will spawn. What will be a minor inconvenience at big banks (who already have bloated compliance departments) becomes a crushing new cost burden at small ones. And he forgets to mention, too, the Durbin Amendment. Small banks are supposed to be exempt from Durbin, of course, but they know they’ll have to price interchange by it anyway if they want merchants to accept their debit cards. Also, the repeal of Reg Q (which prohibited interest payments on business accounts) will add to small banks’ cost of deposits.  

There’s more, but you get the picture. In fact, Dodd-Frank is a disaster for small banks—and for the Treasury Department to argue otherwise is pure chutzpah. The law adds so many new costs that, by common consensus (which I agree with), banks with less than $500 million in assets are simply no longer economically viable, and will feel pressure to sell out—probably at a semi-fire-sale price. Banks above $500 million will see their profitability permanently dented. That’s not good for credit creation for small business, or good for the economy generally. And it’s a high price for these institutions to have to pay, especially since they didn’t cause all the problems in the first place.

What do you think? Let me know!

  Add your comment



puredakota Posted On 10/24/2011 3:48:22 PM

Why is it so difficult for the community banks to see how wonderful Dodd-Frank will be for them?

Harry Weitzel Posted On 10/24/2011 3:55:26 PM

Tom, you of all people should know that the whole focus of the Obama Administration, led by Mr. Summers and Mr. Geitner has been to protect and insulate the TBTF banks so that they can once again drive the economy eventually into an even bigger ditch then the last time.

sgr Posted On 10/24/2011 4:04:40 PM

Spot on. I had dinner with the CEO of a longtime profitable "community bank" with a great record of supporting the communities it serves. He told me that the past couple of years and what he is dealing with now is nothing shy of an assault on their business. The best and brightest on his team are likely going to look for non-banking options soon. NONE want to run a bank anymore. You don't get to run a bank. You get to answer to never-ending waves of increasingly petulant regulators - who have little interest in anything but establishing that they control you.

andrewkahr Posted On 10/24/2011 5:46:29 PM

Your point of view about Durbin is utterly false. Repeal of Reg. Q. = DEREGULATION. Have you heard that word before?

Tad Gage Posted On 10/24/2011 5:49:07 PM

As usual, Tom, you're on-spot. Legislators really seem delusional when it comes to compliance with bank regulation and, while we're at it, the tax code. The smaller you are, the more disproportionate your costs for accounting and regulatory compliance. I don't get how legislators and government officials are so incredibly clueless about this simple principle. It's very sad to so frequently hear from truly committed and dedicated community bankers, "It's just not fun to run a bank anymore." I can't imagine the current banking environment is very appealing to a new generation of young, potential leaders in community banking."

Ed Posted On 10/24/2011 6:11:11 PM

One positive note is that Tom Hoenig, recently retired from the KC Fed, has been nominated to be FDIC vice chairman. He's no fan of Dodd-Frank and is also a hawk on too big to fail. We could probably use Tom more as a voting member of the Open Market Committee where he was a frequent dissenter with the majority vote on low rates but at least he won't be lost to the industry.

Ron Shevlin Posted On 10/25/2011 8:12:20 AM

Tom -- You need to take your analysis another step. Small banks will "will feel pressure to sell out—probably at a semi-fire-sale price." .... And sell out to larger banks, further consolidating the banking industry at the higher end of the size spectrum. How exactly does that "level the playing field between large and small banks"? Answer: It doesn't.

cs Posted On 10/25/2011 1:37:07 PM

A bank is a utility ... a mere extension of the government.
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