White House issues report discussing Dodd-Frank’s impact on community banks

Since the adoption of Dodd-Frank and the formation of the CFPB, there has been widespread disagreement regarding whether Dodd-Frank has adversely affected community banks. Community bankers and trade groups claim that Dodd-Frank has been disastrous for the growth of community banks, adding substantial compliance costs and drastically reducing the number of de novo banks. The government and regulators, on the other hand, insist that the impact of Dodd-Frank has been minimal, that community banks continue to thrive, and that any downturn in community banking is the result of factors other than increased regulation. Last week, the President’s Council of Economic Advisers (CEA) weighed in on the debate, joining other government groups in downplaying the impact of Dodd-Frank on community banks.

The CEA published the August 2016 Issue Brief, entitled The Performance of Community Banks Over Time. The CEA first notes the importance of community banks, which it defines as banks with less than $10 billion in assets. According to the CEA, “Economic evidence finds that community banks remain strong across a range of measures, from lending growth to geographic reach, including in their performance since financial reform passed in 2010.” But as the report later acknowledges, smaller community banks have faced significant struggles in matching the growth of larger ones. The CEA blames lower growth rates on factors other than regulation, asserting that “community banks . . . have faced longer-term structural challenges dating back to the decades before the financial crisis.”

To support its conclusions, the CEA presents five facts:

  1. Lending by all but the smallest community banks has increased since 2010.
  2. Access to bank offices at the county level remains robust.
  3. The average number of bank branches per community bank has increased.
  4. Over the past two decades, the number and market share of the smallest community banks—those with assets less than $100 million—has been declining.
  5. Macroeconomic conditions likely explain a substantial portion of the drop in new bank entry in recent years.

Despite concluding that community banks have not been adversely affected by Dodd-Frank, the CEA acknowledges “the importance of implementing Dodd-Frank in a way that allows community banks to compete on a level playing field.”

Shortly after the CEA released its report, the American Bankers Association expressed sharp disagreement:

There is a serious disconnect between this report and the daily reality for America’s hometown banks and the communities they serve. The 1,708 community banks that have disappeared since July 2010 would be best equipped to speak on this topic – except they can’t.

The more than 24,000 pages of proposed and final rules bely the idea that Dodd-Frank had no impact. The rules intended for the largest banks are now considered “best practices” for all banks, compounding the misery for smaller banks. Arbitrary size thresholds are stopping community banks from growing because of the added regulation, thus limiting the services they could provide.

The Independent Community Bankers of America, however, focused on the portion of the CEA’s report that expressed support for a tiered approach to regulation:

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. 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.

In summary, the CEA report makes clear that Dodd-Frank will continue to be a priority for bank regulators. Although the CEA expresses its support for implementing regulations in a manner that is fair and equitable to community banks, it remains to be seen how that will play out in practice.