The impact of Dodd-Frank on community banks

Bank by Shutterstock.com

Article Highlights

  • Community banks play a vital role in this nation's economy.

    Tweet This

  • Although policymakers enacted Dodd-Frank to avoid too-big-to-fail situations, in reality, its effect is the opposite.

    Tweet This

  • More than 16 million Americans would have severely limited banking access without community banks.

    Tweet This

Subscribe to AEI's financial services emails
Articles and events on the financial services sector. Published approximately once a month.

First Name:
Last Name:
Email:
Zip Code:

Key Findings

  • The purpose of the Dodd-Frank Act was to protect consumers and the stability of the financial system. Community banks provide vital services to millions of Americans, many of whom would be underserved if the community bank model were broken or if community banks were to abandon lines of service. If community banks are forced to merge, consolidate, or go out of business as a result of Dodd-Frank, one result will be an even greater concentration of assets on the books of the "too-big-to-fail" banks. Another result will be that small businesses and individuals who do not fit neatly into standardized financial modeling, or who live outside of metropolitan areas served by larger banks, will find it more difficult to obtain credit. Neither of these outcomes will protect consumers, the financial system, or the recovery of the American economy.
  • Community banks play a vital role in this nation's economy, particularly with respect to small businesses and rural communities, and their continued health and vitality is central to the nation's economic recovery. Community banks provide 48.1 percent of small-business loans issued by US banks, 15.7 percent of residential mortgage lending, 43.8 percent of farmland lending, 42.8 percent of farm lending, and 34.7 percent of commercial real estate loans, and they held 20 percent of all retail deposits at US banks as of 2010.
  • Community banks are a vital source of credit and banking services to rural communities. Community banks are four times more likely than large banks to have an office in rural counties. More than 1,200 US counties--with a combined population of 16 million Americans--would have severely limited banking access without community banks.
  • Community banks were not responsible for the causes of the financial crisis determined by the authors of Dodd-Frank. Community banks did not engage in widespread subprime lending. They did not engage in securitization of subprime residential mortgages. Nor did they use derivatives to engage in risky speculation to maximize return. Community banks simply did not contribute to the financial crisis.
  • Although policymakers enacted Dodd-Frank to avoid too-big-to-fail situations, in reality, its effect is the opposite. The act will force greater asset consolidation in fewer megabanks by increasing the competitive advantage large banks have over smaller banks.
  • Dodd-Frank will make it harder for community bank customers to obtain loans because it encourages financial product standardization, which undermines the relationship banking model and decreases the diversity of consumer banking options. As a result, credit and banking services will be eliminated or become more expensive for small businesses, those living in rural communities, and millions of "informationally opaque" American consumers and businesses that are challenging or less profitable for large banks to serve.
Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Tanya D.
Marsh

What's new on AEI

Making Ryan's tax plan smarter
image The teacher evaluation confronts the future
image How to reform the US immigration system
image Inversion hysteria
AEI on Facebook
Events Calendar
  • 01
    MON
  • 02
    TUE
  • 03
    WED
  • 04
    THU
  • 05
    FRI
Wednesday, September 03, 2014 | 9:00 a.m. – 10:30 a.m.
From anarchy to Augustus: Lessons on dealing with disorder, from Rome’s first emperor

We invite you to join us for two panel discussions on how Augustus created order from chaos 2,000 years ago, and what makes for durable domestic and international political systems in the 21st century.

Wednesday, September 03, 2014 | 12:00 p.m. – 1:30 p.m.
Multiple choice: Expanding opportunity through innovation in K–12 education

Please join us for a book launch event and panel discussion about how a marketplace of education options can help today's students succeed in tomorrow's economy. Attendees will receive a complimentary copy of the featured book.

Thursday, September 04, 2014 | 12:00 p.m. – 1:30 p.m.
How conservatives can save the safety net

Please join us for a luncheon event in which our panel will discuss what conservatives can learn from how liberals talk and think about the safety net and where free-market economics, federalism, and social responsibility intersect to lift people out of poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.