Arkansas is home to dozens of community banks, and it is not hard to see their positive impact on our communities. They not only provide traditional banking accounts for thousands of Arkansans, but they are also a critical source of capital for business and consumers.
Communities around the state rely on these institutions to build up Main Streets and help families buy a house. In fact, many of these banks’ employees live in the neighborhoods they work, meaning the stakes are personal for them as well.
However, community banks around the state – and the country – are under unnecessary stress due to the current regulatory environment put into placed after the Dodd-Frank Wall Street Reform Act of 2010. Between 2010 and 2014, the number of community banks declined by 14%, while 90% of small banks have cited rising compliance costs during that time period. Many predicted this would lead to the elimination or reduction of certain services.
Well, they were right.
One study found community banks’ commercial banking assets have declined “at a rate almost double that between the second quarters of 2006 and 2010,” including a reduction in small business lending volume. In another small bank survey, about a third of community banking executives cited a difficulty in making commercial and farm loans, which is particularly troubling given that community institutions account for a majority of agricultural and small business loans, meaning that stressors on their operations end up impacting all of us. That same survey also found nearly three-fourths of respondents said the current regulations have kept them from offering more home loans.
What can be done to reverse these damaging trends? We need to put in place regulations that allow small banks to serve their customers, while holding the largest Wall Street banks accountable for activity that led to the financial crisis. Currently, Dodd-Frank has too many provisions that disproportionately impact community banks, whether intentional or not.
One such example is the Durbin amendment. Added onto Dodd-Frank as a last minute provision, this law was aimed at debit interchange fees, which merchants charge to accept debit card transactions. Despite interchange fees being unrelated to the financial crisis – they are actually an important revenue source for financial institutions to maintain the complicated electronic payments network – this amendment placed price controls on these interchange fees, effectively eliminating the previously functioning free market that originally governed prices.
Community banks and other small institutions were meant to be exempt from these price controls, but Federal Reserve data shows their interchange revenue has declined.
On top of that, community institutions are spending more money complying with costly routing requirements on these debit transactions. With decreasing revenue and increased costs, is it any wonder community banks are under stress? Never mind that this is just one part of Dodd-Frank’s 2,300 pages of regulations.
Not only are banking customers losing out on important perks, such as debit card rewards and free checking, they are failing to see up to $8 billion in promised savings that the retail industry said they would pass along in the form of lower prices. More than five years later, just one percent have followed through, which leaves retailers benefiting from a $42 billion windfall while their customers lose out.
We cannot afford policies like those contained in Dodd-Frank to hurt our community banks and their customers. They hinder economic growth on both the state and national level, and it keeps our communities from prospering as they should.
The good news is that the House Financial Services Committee has already announced plans to reform the existing regulations. Congress must ensure that the next regulatory environment will help support small banks and the communities they serve, instead of impose burdensome, draconian regulations like those created by Dodd-Frank.
Editor’s note: Nate Steel is a lawyer at Little Rock-based Steel, Wright, Gray & Hutchinson. Opinions, commentary and other essays posted in this space are wholly the view of the author(s).