New federal bank law could punish small, community banks

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, with one bank watcher saying the legislation could force the closure of 50% of banks in Arkansas.

That losing proposition will have an impact on Arkansas communities in a variety of ways, according to this report from TalkBusiness.net.

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’s comments mirror that of execs with banks based or active in the Fort Smith area. Sam T. Sicard, a vice president at Fort Smith-based First National Bank, said in this recent report that the new bill “may further increase our regulatory burden and add additional costs on our business.”

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 said. "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?"

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.

Link here for more information from TalkBusiness.net, including an explanation as to how provisions in Dodd-Frank could raise costs and hamper municipal bond trading.