"Too big to fail" was a common theme of the recent financial crisis. But a growing concern among Florida bank regulators and financial institutions is whether community banks are "too small to comply."
The 2010 Dodd-Frank Act was created with the goal of reining in Wall Street corporations that had contributed to the Great Recession and safeguarding against future financial crises. This new regulatory policy required more rulemaking by existing federal regulators: the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. In addition, Dodd-Frank created a totally new organization, the Consumer Financial Protection Bureau.
Today, burdensome federal regulation continues to sweep through the U.S. financial services industry, and community financial institutions are struggling to comply with the massive amount of paperwork and cost to everyday operations. The tsunami of nearly 20,000 pages of rules and regulations has had far-reaching, costly impacts on the financial services industry and regulatory climate.
The effect of Dodd-Frank seems to be a perversion of its original intent. Rules and regulations intended for bigger banks and financial institutions are adversely affecting smaller banks, delaying growth and recovery. Community banks have traditionally supported local agricultural and small business needs by incorporating information about borrowers' characters into lending decisions. But Dodd-Frank has standardized lending practices, which works to the advantage of large banks and punishes community banks.
A February study published by the Harvard Kennedy School for Business and Government examined the impact of Dodd-Frank on small community banks. Ultimately, the authors found that Dodd-Frank has been disastrous for both businesses and consumers. The study emphasized the 19% drop in assets among small community banks since the passage of Dodd-Frank and these banks' dwindling market share in areas such as agricultural, and commercial and industrial lending. Individual lending is an area where community banks are better suited to compete because of their local advantage. Nonetheless, small community banks have lost 18% of the business, while large banks have seen a 36% increase. A recent Independent Community Bankers of America survey indicated similar constraints on consumer lending.
While protecting consumers is a major part of Florida regulators' mission, the CFPB has become another rulemaking body producing massive quantities of new rules that are swamping the financial services industry. With more than 1,300 employees, the CFPB has more employees than several $10 billion banks. In Florida, we have state-chartered banks with fewer than 100 employees, and a $1 billion bank with less than 150 employees. Absorbing and reacting to 20,000 pages of regulation is a massive task.
In 2014, George Mason University published a survey of 200 financial institutions in 41 states. Results showed that 90% of financial institutions report increased compliance costs since the passage of Dodd-Frank, and 83% report cost increases of more than 5%. The same survey reported that more than 25% of community banks would hire new compliance or legal personnel in the next 12 months.
As a result of these changes, banks in the Sunshine State are merging because they are, in the terms of the Florida Office of Financial Regulation, "too small to comply." Banks are consolidating so that they will have sufficient resources to endure the new federal rules and regulations. While this helps them survive, the trend is extinguishing local community banks and replacing them with branches of banks headquartered elsewhere that often lack an understanding of local communities.
Increases in federal regulation have left businesses and borrowers with fewer options. As commissioner, it is my belief that one size does not fit all. Federal policymakers need to scale regulations back so that community institutions and the economy can grow and thrive.
Drew J. Breakspear is commissioner of Florida's Office of Financial Regulation.