ABA Rebuts White House, Says Dodd-Frank Hurt Small Banks

WASHINGTON — The American Bankers Association has fired back at a White House research note that argued the Dodd-Frank Act was not driving community bank consolidation.

In an Aug. 24 letter to Jason Furman, chairman of the White House Council of Economic Advisers, ABA President Rob Nichols said the council's conclusion that community banks are not being affected by the 2010 banking law flies in the face of the experience of the trade group's members.

"A conversation with any community banker would dispel this forced conclusion," Nichols said. "The thousands of new regulations that have been imposed on community banks is an enormous driver of decisions to sell to a larger bank."

The Aug. 10 research note said while institutions with less than $10 billion of assets remain mostly viable, smaller banks "have faced longer-term structural challenges dating back to the decades before the financial crisis."

But Nichols' letter noted that the compliance pressures on community banks since the passage of Dodd-Frank have driven many from their traditional businesses, such as mortgage financing. The ABA conducted a survey earlier this year of members that found that the new rule combining mortgage disclosure regimes of the Truth in Lending Act and Real Estate Settlement Procedures Act has delayed loan closings. In another survey, 72% of community banks said the ability-to-repay mortgage underwriting rule has limited their ability to extend credit. What is more, Nichols said, the paltry number of new banks that have been chartered since Dodd-Frank speaks to how unattractive the business is for new entrants.

"If this trend continues unabated, there will be fewer financial services in communities and less economic growth," Nichols said. "Whether intended or not, the Dodd-Frank Act has added fuel to industry consolidation, reduced flexibility for product offerings, and increased the cost of providing financial services — a cost that is ultimately … borne by customers."

The impact of post-crisis regulations on community banks is a major flashpoint in the competing political narratives about the impact of Dodd-Frank. The number of small banks with assets of less than $10 billion has been declining for decades, driven to consolidate in order to capture the market efficiencies that size confers.

The Obama administration has repeatedly emphasized the extent to which new rules are "tailored" to either exempt community banks or reduce their compliance costs substantially relative to those of the larger, riskier banks. But Republicans and many in the industry have argued that those measures are not enough to outweigh the compliance burdens that community banks have faced since the passage of the law.