In the wake of the financial meltdown in 2008, Congress passed and President Obama signed the Dodd-Frank law which was intended to regulate big banks and address the causes of the financial crisis. As so often happens with legislation, despite good intentions, bad consequences have flown from the Dodd-Frank law, hereinafter Dodd-Frank. Our community banks, defined as those with less than ten billion dollars in assets, have been taking it on the regulatory chin. They have seen their compliance costs soar and there has been a huge wave of consolidations leaving customers with fewer options, fewer choices in banking services, and loans more difficult to find for small businesses and start-ups. But, help is on the way.
Congress and the Trump Administration are aware of the problem and are taking steps to correct the problems caused by Dodd-Frank. The U.S. House Financial Services Committee Chairman Jeb Hensarling (R-TX) said, “Community financial institutions are being crushed by Washington’s ‘one-size-fits-all’ regulatory approach. We are losing, on average, one community financial institution each day – and they are not dying from natural causes but from the sheer weight, volume, complexity and expense of Washington’s rules. So our plan requires financial regulators to tailor regulations so they fit a bank or credit union’s business model and risk profile. This allows America’s small, hometown banks and credit unions to focus their time and resources on serving their customers rather than the dictates of Washington bureaucrats.”
The Virginia Association of Community Banks, representing roughly ninety-five financial institutions in Virginia, has pushed the Trump Administration to make the Financial Choice Act a priority. Earlier this year a larger umbrella group of community bankers, including a representative from Virginia, met with president Trump and other members of his administration to stress the need for relief from the burdensome regulations imposed on them by Dodd-Frank.
According to a study by the Mercatus Center at George Mason University, community banks have seen compliance cost sky-rocket and the number of compliance officers double to handle the increase in regulations. The study also found that the regulations were forcing community banks to discontinue a number of services including elimination of residential mortgage lending. Nearly twenty-five percent of the banks were considering mergers.
A study by the Kennedy School for Government at Harvard, says adding just two members to the compliance department would make one-third of the smallest banks unprofitable. The country cannot afford to lose it small banks because, as the study indicates, small banks account for three-quarters of all agricultural loans and half of all small business loans. These small, generally well-run, banks were not the source of the financial crisis but now bear the brunt of the regulations designed to address failures by the big banks that were deemed “Too Big to Fail.”
The House Financial Services Committee reports that in 2010, the year Dodd-Frank was enacted into law there were 7,658 banks but by the end of 2016 that number had declined to 5,980. The loss of banks was not off-set by new start-ups. The Committee, citing the Richmond Federal Reserve, indicates that while there were 170 banks chartered each year in the country between 2000 and 2008, that number dropped to less than one bank chartered each year since the enactment of Dodd-Frank.
The House Financial Services Committee reported the Financial Choice Act, H.R. 10, to the full House of Representatives on May 4, by a vote of 34-26. In an effort to provide relief to financial institutions with a special focus on small, community banks and their role in growing the economy, the House of Representatives debated the Financial Choice Act the week of June 5, 2017. The bill passed the House on June 8, by a vote of 233-186 and now moves to the Senate for further action before going to the president’s desk and an expected presidential signature into law.