WASHINGTON — The Dodd-Frank Act of 2010 has not had a negative impact on community banks, contrary to assertions by Republicans and many bankers, according to a group of White House economists.
In a research note published Wednesday, the White House Council of Economic Advisers said that evidence demonstrates that institutions with less than $10 billion of assets remain mostly viable and give millions of Americans access to important financial services. But other secular trends — such as deregulation of bank branching and merger and acquisition activity — have caused some community banks to contract in the years since Dodd-Frank was enacted.
“The findings … show that access to community banks remains robust and their services have continued to grow in the years since Dodd-Frank has taken effect, though this trend has not been uniform across community banks, with mid-sized and larger community banks seeing stronger growth than the smallest ones,” the note says. “At the same time, though, many community banks—especially the smallest ones—have faced longer-term structural challenges dating back to the decades before the financial crisis.”
The note argues that the perils facing smaller banks “underscore the importance of implementing Dodd-Frank in a way that allows community banks to compete on a level playing field” and says that the Obama administration has been committed to developing regulations that shield community banks from the harshest requirements in the law.
The economists' note is aimed at debunking a long-standing point of contention between Dodd-Frank’s champions and detractors — namely that instead of ending an implicit policy of not allowing the largest and riskiest institutions to fail, it has in practice led to a new regulatory landscape that disproportionately affects the smallest banks that are the least equipped to take on added compliance costs.
Sen. Marco Rubio, R-Fla., said during his now-defunct presidential campaign that Dodd-Frank had “eviscerated” community banks, and House Republicans have repeatedly leveled the same claim.
The White House paper, of course, is unlikely to end the debate. Bankers repeatedly point to the decline in institutions as proof that the law is making it harder for small institutions to stay in business.
The White House research note was quickly criticized by House Financial Services Committee Chairman Jeb Hensarling, who said he was not surprised that the White House would defend Dodd-Frank, but that community bankers who have testified before the committee beg to differ with the economic advisers' conclusions.
"After all, as our nation loses one community financial institution each day, they are the ones who have to somehow comply with Dodd-Frank's crushing regulatory burden," Hensarling said in a statement.
The American Bankers Association also blasted the report, with ABA President Rob Nichols saying in a statement that there was a "serious disconnect between this report and the daily reality for America's hometown banks." Nichols said it is true that there are more factors at play than Dodd-Frank alone, but the idea that the law has not contributed to small banks' woes is unfounded.
"Certainly, there are other factors beyond the Dodd-Frank Act that have caused the closure of community banks, and bankers continue to work with their regulatory agencies and Congress to address these issues," Nichols said. "But the more than 24,000 pages of proposed and final rules belies the idea that Dodd-Frank had no impact."
Carrie Hunt, executive vice president of government affairs and general counsel for the National Association of Federal Credit Unions, similarly criticized the CEA's findings, saying that "common sense is the largest piece of evidence demonstrating the Dodd-Frank Act's negative impact on credit unions."
Community bankers themselves had a more measured response to the White House document. Camden Fine, president of Independent Community Bankers of America, a trade group representing community banks, said the troubles facing small banks are not attributable to Dodd-Frank alone or any single law, but rather a patchwork of different regulatory and legal burdens that have accumulated over decades. Fine said that, to the extent that the research note advocates for greater relief for small banks from those compliance burdens, the ICBA supports its findings.
"Today's Council of Economic Advisers brief expresses support for regulatory requirements that are tailored to the unique role and lower risks of community banks-a bipartisan priority that avoids one-size-fits-all regulations," Fine said. "ICBA will continue advocating tiered and proportional regulations that allow community banks to reach their full potential as catalysts for locally based entrepreneurship, economic growth and job creation."