Economy not always the reason small banks are closing

I do most of my banking with a very large national bank but I do have a couple of accounts with local banks as well. In the last couple of years I noticed that I have to travel farther and farther to bank with the smaller banks due to so many local branches closing. I assumed that the economic crisis played a big role. Some recent studies and reports reveal that regulation under Dodd Frank is putting immense strain on community banks.

Overall, Dodd-Frank is a tremendous piece of legislation. The Committee on Financial Services reports the act spans about 2,300 pages with more than 400 rules and mandates, about 250 of which still to be determined. 

The uncertainty inherent in such a massive regulation has required banks to hire compliance officers, a budget expense that some smaller banks simply cannot afford. But many of the challenges for smaller banks are in the regulation itself. American Banker reported that Comptroller Thomas Curry is concerned with “a number of provisions that … many in the industry thought would not apply to community institutions.” Specifically, the act encourages a move away from institutional reliance on credit ratings agencies. This will have “a profound impact on community banks, which lack the institutional structures and analytical resources to undertake independent due diligence,” reports Louise C. Bennetts of American Banker. These banks have to find new ways to make money as well. The low interest rate environment means that the traditional business of lending is not especially lucrative so banks have to figure out other ways to bring in revenue. Such measures will most likely hurt consumers as they will need to pay more for loans and basic banking services, predicts Bennetts.  

But community banks are fighting back and informing regulators of the need for changes. The Hill reported the Independent Community Bankers of America (ICBA) smaller banks were not responsible for the financial crisis and they should be carved out of the many new restrictions stemming from Dodd-Frank. So far, regulators are receptive to the message. Federal Reserve Chairman Ben Bernanke told ICBA members that regulators were looking to achieve a “clear distinction” between large and small banks in drafting their rules.

This is just one more indicator that there is still lots to do and lots to learn from Dodd Frank.

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