In response to the financial crisis of 2008, the U.S. Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010. This July marks three years since President Obama signed the bill into law, and we’ve had ample time to observe and evaluate the impact of its more than 400 new rules and mandates.
It is increasingly clear that what was aimed at protecting consumers and bringing stability to our financial system has instead done great harm to the financial institutions rural Americans depend on most: community banks. Community banks are vital to small businesses and economic growth, the drivers of job creation. Additionally, they are the only financial service providers available in 1,200 U.S. counties. Although community banks contributed little to the financial crisis, they were swept up in the rush to regulate the financial system and have been drowning in a sea of Dodd-Frank-imposed costly regulation ever since.
In terms of both size and mission, community banks differ significantly from the Wall Street banks famously deemed “too-big-to-fail.” While investment banks engage in a wide range of business activities, Main Street banks focus on the traditional banking model and personal relationships with customers; they accept deposits and reinvest them back into the community in the form of loans.
Dodd-Frank’s one-size-fits-all regulatory structure subjects large banks and community banks — institutions that serve vastly different customer bases — to the same standards. Banks large and small play important roles in our economy, and we need a regulatory framework that acknowledges and reflects their differences. Unfortunately, that’s not the case today.
Community banks are being disproportionately hurt by Dodd-Frank’s rules and recordkeeping requirements because they are less able to absorb compliance costs. Resources that would otherwise be directly applied to serving clients and the community are now being spent hiring the staff, lawyers and consultants necessary to comply with the flood of new regulations.
As community banks abandon their traditional business models and redirect resources to comply with Dodd-Frank, millions of Americans will have a tougher time accessing financial services and credit. In Kansas, that means fewer loans to small businesses that want to expand and fewer loans to farmers and ranchers who need to fund operations through harvest. This decrease in the availability of capital could result in stagnant growth, a reduction in new-business formation, and less job creation — a death knell for rural America.
These negative consequences are not just hypothetical; a study by the Federal Reserve Bank of Kansas City shows the harms of Dodd-Frank regulatory burdens are already manifesting themselves. Of the 322 small financial institutions surveyed, 79 percent rated regulatory compliance as a significant challenge for their institution — up from 66 percent in 2008 and 42 percent in 2004. Consequently, 91 percent are bracing for increased training costs and software upgrade expenses due to Dodd-Frank compliance.
It is clear that more must be done to make this law workable for American financial institutions and the customers they serve. With hundreds of regulations yet to be enacted, community bankers know the full implementation of Dodd-Frank may be too enormous a burden for them to bear. Last fall, a community bank in Missouri was forced to close its doors because the owners forecasted that Dodd-Frank would add $1 million per year to the bank’s expenses and make it unprofitable. This is not a lone case; a 2013 policy paper published by the Federal Reserve Bank of Minneapolis estimates that hiring two additional bank employees to deal with regulatory compliance would make 33 percent of smaller banks unprofitable. In Kansas, we’ve seen a large amount of community bank mergers — in large part because of this very issue.
If community banks continue to go out of business or are forced to consolidate, we can expect to see an even greater concentration of assets among the “too-big-to-fail” institutions — and a greater number of Americans without a local bank. These unintended Dodd-Frank consequences will not protect consumers, stabilize the financial system or promote recovery of the American economy.
These developments are so worrisome because of the vital role community banks play in our economy, particularly with respect to small businesses and rural areas. Community banks provide more than 48 percent of small business loans issued by U.S. banks, nearly 43 percent of farm loans, and nearly 16 percent of residential mortgage loans. Every dollar a community bank must spend on Dodd-Frank compliance is a dollar less they can invest in businesses and lend to families in their community.
Congressional Democrats and Republicans agree Dodd-Frank wasn’t perfect three years ago and remains problematic today. Continuing to make sensible modifications to Dodd-Frank would go a long way toward bringing more stability to our financial system while protecting the viability of rural America and the special way of life it provides.
U.S. Senator Jerry Moran, R-Kan., is a member of the Senate Banking Committee and serves as the ranking member of the Banking Subcommittee for Housing, Transportation, and Community Development. He is the sponsor of the Financial Institutions Examination Fairness and Reform Act.