Dodd-Frank Regulation and its Effects on Community Banks

Author: Suman Ghosh

Release Date: September 27, 2017

MEDIA CONTACT: Jim Hellegaard

561-319-2233, jhellegaard@fau.edu

Seven years into its enactment, Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 appears poised for an overhaul, with many wondering what can be done to reverse the impact it has had on community banks.

The Financial CHOICE Act of 2017, proposed to repeal Dodd-Frank, passed through the House of Representatives in June. Currently stalled in the Senate, the bill seeks to roll back some of the important provisions of Dodd-Frank, which was passed in the wake of the financial crisis of 2008-2009. Supporters of the Financial CHOICE Act claim that Dodd-Frank is too onerous for small banks in that it unnecessarily raises compliance costs, limits lending and reduces non-interest fee income.

Opponents of the Financial CHOICE Act say the correlation between the demise of community banking and Dodd-Frank is highly overstated and argue trends in the community banking industry predate the advent of Dodd-Frank and are unrelated to the post-crisis regulatory regime.

Of economic interest to me and my fellow researchers is the contribution of Dodd-Frank towards the paucity of post-crisis commercial credit, particularly small business credit, and its multiplier effects on local economies.

In our soon-to-be-published research, my colleagues and I have found evidence that community banks tend to trade off regulatory overhang with organic growth. We observe that banks exhibit a “bunching” pattern whereby they tend to curtail their growth beyond the limit until which the regulatory burden hits them. Post Dodd-Frank, 80 percent of community banks are in the $9-10 billion asset range, right at the upper edge of being considered a community bank.

We developed cross-sectional results across banking, geographical and time dimension to study the real consequences in terms of how small business lending is affected as a result of this bunching behavior of the community banks. We find that as a result of regulation small business lending is severely affected, which in turn has negative consequences to the local economies in terms of employment and business activity.

Suman Ghosh is a professor of economics and Stone Fellow at Florida Atlantic University's College of Business. The opinions expressed in this article are those of the author and do not reflect or represent the opinions of Florida Atlantic University.