Bankers push back on White House claim that Dodd-Frank has helped community banks

A new brief from the White House Council of Economic Advisors that claims that Dodd-Frank reforms have helped community banks met with resistance from the banking community and at least one former banker-turned-Congressman.

On Wednesday (Aug. 9), the White House released a 13-page white paper that declared economic evidence shows community banks “remain strong” in areas of lending growth, geographic reach and performance since the massive regulatory reform bill became law six years ago.

Named after legislative authors U.S. Sen. Chris Dodd, D-Connecticut, and U.S. Rep. Barney Frank, D-New York, the “Dodd-Frank Wall Street Reform and Consumer Protection Act” was signed into law on July 21, 2010. It was passed in response to the near collapse of several large U.S.-based banking operations in 2007-2008. Democratic leaders in Congress blamed the financial problems on a lack of federal oversight.

Key provisions of the Act, which are expected to be more fully articulated in 2013 and 2014, included:

• Creation of a consumer interest “independent watchdog” housed at the Federal Reserve;
• Establishing capital requirements designed to end the “too big to fail” possibility among the big banks;
• Creating an “advance warning system” to identify systemic problems before they become big problems;
• Eliminating loopholes that allow the “exotic instruments” that helped fuel the financial meltdown in 2008; and,
• Creating new accountability and transparency rules for credit rating agencies.

The law was designed to increase examination and enforcement of banks and other financial service companies with more than $10 billion in assets. However, regulations also increased for banks under the $10 billion threshold.

WHITE HOUSE REPORT
In the Council of Economic Advisors report released Wednesday, the authors said that “the findings in this brief, as well as research by other economists, show that access to community banks remains robust and their services have continued to grow in the years since Dodd-Frank has taken effect, though this trend has not been uniform across community banks, with mid-sized and larger community banks seeing stronger growth than the smallest ones.

“At the same time, though, many community banks — especially the smallest ones — have faced longer-term structural challenges dating back to the decades before the financial crisis. These structural challenges underscore the importance of implementing Dodd-Frank in an equitable way that gives community banks a fair chance to compete, which has been a key priority for the Obama Administration.”

The white paper noted several key takeaways:

• Lending by all but the smallest community banks has increased since 2010.
• Access to bank offices at the county level remains robust.
• The average number of bank branches per community bank has increased.
• Over the past two decades, the number and market share of the smallest community banks — those with assets less than $100 million—has been declining.
• Macroeconomic conditions likely explain a substantial portion of the drop in new bank entry in recent years.

BANKER REACTION SWIFT
It took less than one day for critics of the White House position to rebuff the claims. In a statement from the American Bankers Association, the group said that the White House economic team had a “serious disconnect” while pointing out that smaller banks have closed, relatively few new charters have materialized, and that banking options are becoming more limited.

“There is a serious disconnect between this report and the daily reality for America’s hometown banks and the communities they serve. The 1,708 community banks that have disappeared since July 2010 would be best equipped to speak on this topic – except they can’t. Unfortunately, we hear from many community bankers from strong, healthy banks that are ready to sell because new regulations have made it much more difficult to meet the needs of their clients, customers and communities,” said Rob Nichols, ABA president and CEO.

“Ask community bankers this question: Since Dodd-Frank, have you hired more loan officers or more compliance officers? Then ask bank customers how much service they get from compliance officers. The current state of affairs means fewer loans, slower job growth and a weaker economy.

“Certainly, there are other factors beyond the Dodd-Frank Act that have caused the closure of community banks, and bankers continue to work with their regulatory agencies and Congress to address these issues. But the more than 24,000 pages of proposed and final rules belies the idea that Dodd-Frank had no impact. The rules intended for the largest banks are too often considered ‘best practices’ for all banks, compounding the hardship for smaller institutions. Arbitrary size thresholds are stopping community banks from growing because of the added regulation, thus limiting the services they could provide.”

Nichols’ statement warned that bank mergers and few new charters are leading customers and communities to a more limited opportunity of banking options.

“Instead of documenting the dramatic decline in the number of banks, lawmakers should work with the industry on how to reverse that trend,” Nichols said. “Comprehensive regulatory relief is long overdue for community banks. These institutions are working hard to drive economic activity in America’s cities and hometowns, but the regulatory environment is holding them back. And each day another community bank leaves the field, it makes that community – and our economy – poorer.”

CONGRESSMAN AND BANKER
At a Thursday morning breakfast with the Central Arkansas Risk Management Association, U.S. Rep. French Hill, R-Little Rock, told a roomful of about 60 bankers that his work on the House Financial Services Committee has resulted in roughly 30 new laws that have tweaked Dodd-Frank, but it hasn’t made any of the massive corrections that he and other bankers feel will reverse the legislation’s negative impact.

Hill and other House GOP members are pushing the “CHOICE” act, which would look back at the past six years of Dodd-Frank’s impact and make revisions to would lead to “a better safer, stronger banking industry.”

The CHOICE act would:

• Repeal the Financial Stability Oversight Council and eliminate the Office of Financial Research;
• Repeal the orderly liquidation authority, which gives federal regulators the authority to seize troubled financial firms with minimal judicial review;
• Reforms the Consumer Financial Protection Bureau;
• Restricts the Federal Reserve’s emergency lending authority;
• Eliminates the Volcker rule, which currently prohibits certain kinds of speculative investments that do not benefit customers. Bankers contend the rule can be applied to some basic loan functions for traditional lending; and
• Strengthening penalties for fraud by doubling the cap for the most serious securities law violations and tripling fines when penalties are tied to illegal profits.

In a Presidential election year, Hill said he’s realistic enough to know that the measure is unlikely to come up for a vote, much less pass into law.

“In September, I would hope we would have some hearings on the legislation, and possibly a mark-up. I think that would be difficult,” he said. “A mark-up is where the full legislation comes to the committee and is voted out of committee and sent to the House. I think there’s a remote possibility we could have a mark-up. That would then tee up the CHOICE act and its provisions to work with the next President in the next Congress.”

Hill said bipartisan support exists for doing more in the U.S. House, but the Senate will be the biggest obstacle to repealing or reversing the law’s intended and unintended consequences. Sen. Elizabeth Warren, D-Mass., was one of the advisors and lead champions of Dodd-Frank reforms before she was elected to office in 2013.