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Is Dodd-Frank Really Killing Community Banks?

WASHINGTON The Dodd-Frank Act has become the catchall for a litany of alleged harms, not the least of which is the decline of small banks.

Sen. Marco Rubio, R-Fla., a presidential contender, charged earlier this month that the reform law is "eviscerating" the community banking industry an all-too-common refrain, even if his data proved to be overstating the case.

Yet while it's clear that the banking industry continues to shrink, how big a role Dodd-Frank is playing in the decline is debatable. Below we offer a look at what the financial reform law has meant for small banks, along with some of the other economic and market forces that are contributing to industry consolidation.

How many banks are there?

Overall, the total number of banks in the country has been gradually declining for decades.

There were more than 18,000 institutions in the 1980s, compared to just over 6,400 in the first quarter of 2015, according to the Federal Deposit Insurance Corp.

Despite a myriad of competing forces on the financial services industry over that period, the rate of consolidation has proven to be fairly gradual, averaging out around 3.5% each year. The pace did slow somewhat in the mid-2000s, but the shrinking has never stopped or reversed.

On average, it is only slightly higher since the passage of Dodd-Frank in 2010, falling by about 4% per year since 2009.

Small banks continue to make up the vast majority of the financial services industry 98% of banks have fewer than $10 billion of assets, while 89% are smaller than $1 billion.

The biggest impact of consolidation has been on the largest and very smallest banks, according to a 2014 FDIC report. Institutions smaller than $100 million declined by 85% from 1985 to 2013, while banks with more than $10 billion of assets nearly tripled.

The credit union industry has evolved in a similar fashion. The number of federally insured credit unions has slowly fallen from roughly 18,000 around 1980 to just over 6,200 in the first quarter of 2015, according to the National Credit Union Administration. The smallest institutions those with fewer than $10 million of assets have taken the biggest hit over that period.

But some regulators do not blame Dodd-Frank for causing the recent decline.

"Right now when we look at consolidation trends in credit unions, we're not able to pick up a shift or acceleration" since Dodd-Frank was passed, said Ralph Monaco, a senior economist with the NCUA. "That's not to say Dodd-Frank is not having an effect, but along with other factors moving the industry toward consolidation, it's not having an outstanding effect."

It's worth noting that while the number of financial institutions continues to decline, the financial services sector is growing. The spoils are simply shared among fewer players. The banking industry now controls over $15 trillion of assets, while the credit union industry oversees more than $1 trillion of assets.

So what does Dodd-Frank's impact look like?

The raw numbers alone don't necessarily give a complete picture. For critics of the law, it remains clear that Dodd-Frank is at the root of the industry's problems.

"Since the fall of '08 we have lost one community bank a day seven days a week as a result, quite truthfully, of, obviously competition from nonbanks, but most particularly by a huge regulatory burden, some 12,000 pages of proposed and final rules in Dodd-Frank," Frank Keating, president and chief executive of the American Bankers Association, warned in a television interview on Tuesday.

It would be difficult to imagine that Dodd-Frank hasn't had any impact on the industry given its vast scope, but parsing out whether the law is the definitive factor that leads a bank to close or merge is much more difficult.

"No single institution is going to tell you, 'I closed because of Dodd-Frank,' but what they will tell you is, 'in no way did Dodd-Frank help me stay open,'" said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association.

On the ground, the story community banks tell is a more complicated one. Bankers seem more inclined to point to specific, troublesome rules within the law, rather than blaming Dodd-Frank in its entirety. In fact, much of the law is focused on winding down the country's largest institutions and reining in non-banks.

"If Dodd-Frank was written exactly as it's written except there was no Consumer Financial Protection Bureau, no Title X of the law, community banks really wouldn't feel much of the impact from Dodd-Frank it would be marginal at the most," said Camden Fine, president and chief executive of the Independent Community Bankers of America.

He added that while the consumer agency has been responsive to some of ICBA's concerns, "they have not gone nearly far enough."

Smaller banker complaints have probably been loudest over new mortgage restrictions, including the CFPB's "qualified mortgage" rule.

That's the one that has "caused the greatest amount of distress internally," said Jill Castilla, president and chief executive of Citizens Bank of Edmond in Oklahoma.


(8) Comments



Comments (8)
My data tells me that lots of smaller banks are actually embracing DFAST. Sr risk managers always wanted to do this kind of risk analytics but never could. Now they have the regulatory mandate.
Posted by WB indy analyst | Thursday, August 20 2015 at 1:08PM ET
All good comments. I wonder if anyone has tabulated the number of compliance/regulatory related jobs created due to this mountain of bricks heaped on all banks? I've heard stats as high as 1 out of every 2 new jobs being created in banks is to keep the banks compliant with the new regulations. If that's true, it can't be a very good or sustainable model.
Posted by 411user | Thursday, August 20 2015 at 11:07AM ET
For decades the regulatory progression has been to add additional bricks to the hod, without sunsetting or eliminating repetitive, overlapping or useless burden. Dodd-Frank and the CFPB have simply heaped hundreds of additional bricks onto our backs at a time when low rates and shrinking margins are seriously impacting earnings. Our mortgage department has literally been working for months to prepare for the new TIL disclosures coming in October. Instead of developing new product or sources of business they are focused on COMPLIANCE with a meaningless new disclosure that will only further confuse consumers and provide not an iota of safety to a home buyer. Screw Chris Dodd, Barney Frank and Elizabeth Warren. You caused the crisis and now your shooting the wounded to grandstand for your public.
Posted by Hambone | Thursday, August 20 2015 at 10:36AM ET
A serious fallout indeed!
Posted by maheshchourushi | Thursday, August 20 2015 at 12:38AM ET
While it is true that the economics of scale has been shifting away form community banks for many years i.e. before Dodd/Frank so Dodd/Frank is not the only reason for the shrinking of community banks. That said, you have to be from Mars if you believe the mass of regulations and heavy handed enforcement is "not" a significant factor in the rapid disappearance of community banks. It is also true that many small rural communities are badly hurt when their home owned bank merges into a larger metropolitan bank. Unfortunately, our Washington policy makers think this is progress.
Posted by 191111 | Wednesday, August 19 2015 at 12:48PM ET
There is more than just regulation that is eviscerating community banks. As a general observation, community banks historically relied on real estate secured loans to make up the bulk of their portfolios. Credit unions have now moved into real estate lending in a big way. The tax advantages credit unions enjoy is putting considerable pricing pressure on community banks. In the end, credit unions will own the real estate lending space unless community banks band together and convince Congress to make all business loans subject to Federal income taxes.
Posted by 411user | Wednesday, August 19 2015 at 10:49AM ET
Leadership succession cannot be underestimated. There is a limit to how many able people want to run a small community bank when the perks of leadership have been reduced as they have. And there is simply not enough money in the institutions to pay significant cash compensation, so about all that's left is to try to build it up and sell it and cash in on options. The deferred satisfaction is less appealing these days.
Posted by rebarnett | Wednesday, August 19 2015 at 9:06AM ET
Great post www.eliteduilawyers.com
Posted by ColinFraser | Wednesday, August 19 2015 at 7:46AM ET
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