Financial leaders across Arkansas - big banks, small banks and investment operations - all agree that the recently passed Dodd-Frank financial reform bill will cost them money.

That losing proposition will have an impact on Arkansas communities in a variety of ways.

J. French Hill leads Delta Trust & Bank, a bank with $314 million in assets serving southeast, central and northwest Arkansas.  He contends that additional regulations and their accompanying uncertainty will have a detrimental effect on every bank in Arkansas.

"I believe that the Dodd bill, while it does many constructive things, will cause an extreme increase in expenses for banks of all sizes, including community banks," Hill said.

Hill explains that a number of items in the Dodd-Frank measure will require local banks to take more precautions on many routine transactions in order to avoid penalties from bank examiners. New definitions of what will pass capital requirements may force banks into the difficult task of having to raise even more capital during this tough recession.

The net effect: less money for consumer lending.

"If it increases expense and reduces income for banks, then it reduces capital available and increases uncertainty risks for banks," Hill tells Talk Business. "In other words, it makes them more cautious because of exam risks.  That combination of uncertainty and caution plus reduced profits by definition reduces capital for lending."

Ken Hammonds, president of the Arkansas Bankers Association echoes Hill's concern, especially for banks in communities such as Brinkley, Mountain Home, Mena or any other small town in state.

"A full time compliance staff is not an option for a $200 million bank," Hammond said. "The small town bank customer will be greatly hurt by Dodd-Frank because it will constrict credit and drive up the cost of bank products."

Hammond worries that once Dodd-Frank is fully implemented - which could take five years or more - as many as 50 percent of the community banks in Arkansas could close. "These banks are the backbone of rural Arkansas and the powers in Washington are going to drive them out of business," he said. "How does that help our economy or the consumer of bank products?"

Don Winton is the Chief Operating Officer of Crews and Associates, an investment banking operation in business for more than 30 years. Crews is a subsidiary of First Security Bancorp, a $3.16 billion bank holding company headquartered in Searcy.

Several provisions of Dodd-Frank will impact Crews' operations.  For starters, Winton points out that new broker registration and reporting requirements will force his company to utilize resources "at levels that are yet to be determined."

The financial reform law will create a federal Office of Financial Research (OFR), which will operate to a degree like a think tank. It will collect information, data, and provide analysis in an objective effort to identify systemic risk in the system before it happens in the marketplace.

But the OFR will certainly cost Arkansas financial firms more money.

"This new office equates to significant increases in the amount of data and information to be reported by financial institutions," Winton noted. "The reporting must include all positions, all trades, and all terms related to the positions and trade, and this will be a huge undertaking for all broker dealers and financial institutions."

Winton also cites a litany of provisions in Dodd-Frank that could raise costs and hamper municipal bond trading, a core income sector for Crews and Associates.

Another area of concern for many financial institutions is in the soon-to-be-created Consumer Financial Protection Bureau.  This new arm of federal regulation is described by French Hill as a "consumer regime," which he expects will direct other federal and state regulators to investigate normal local banking practices in a way that will, again, drive up costs.

He says it is a misnomer that banks below $10 billion in assets won't be affected, a talking point used by supportive politicians in finding loopholes for Arkansas banks. Hill argues that the new consumer bureau will be writing regulations that will cause bank examiners to force more compliance of regulations for banks over and under the $10 billion threshold.

"I think it (the bureau) is the biggest item that affects the most people and it will have the most expense on the system," he said.

Hill thinks the additional consumer oversight should have been limited to previously unregulated areas of the financial system, such as the mortgage brokerage arena, which was at the heart of the financial system's collapse.

So is there anything positive in the Dodd-Frank law for Arkansas bankers?

Hill points to one monumental improvement.

He says the way the Federal Deposit Insurance Corp. (FDIC) assesses premiums for its bank insurance program will change in a very positive way for Arkansas banks.  Dodd-Frank altered the formula for premium assessments from basis points against a bank's deposits to include other bank assets.

For large national or international banks operating in the U.S., which are often light on deposits as a percentage of their assets, they'll pay more to help protect failing smaller U.S. banks.

"This will shift some of the funding at the FDIC insurance fund to the super-large banks that disproportionately caused systemic financial issues in the past," Hill said.

RECOMMENDED READING:

What Does Dodd-Frank Do?

How Will Financial Reform Affect Main Street?