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Dodd-Frank’s impact on access to credit

On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act, passed in response to the Great Recession, brought the most sweeping changes to our financial regulatory system since the financial reforms enacted after the Great Depression in the 1930s.

It amended the Federal Reserve Act to ensure that “the financial stability of the United States (would be promoted by) improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect the American consumers from abusive financial services practices, and for other purposes.”

Now, almost five years later, we are starting to feel Dodd-Frank’s impact on our banking system and access to credit for business and consumers.

Some folks believe that Dodd-Frank was written on a stone tablet delivered from the Mount; others believe that it arrived in a fiery chariot directly from the devil himself. The facts are that Dodd-Frank required regulators to conduct 67 studies, write 243 new rules and, going forward, issue 22 periodic reports to Congress. This was and will be done through the creation of the Federal Stability Oversight Council, the Office of Financial Research and the Consumer Financial Protection Bureau (CFPB).

How is all this impacting small business and consumers here in southern Beaufort County? Well, before 2009, our local financial marketplace was served by companies like Wachovia Bank, Carolina First Bank, Liberty Savings Bank, RBC/Centura Bank, BankMeridian, Harbourside Community Bank, Beach First Bank, Woodlands Bank and First Federal Bank. All those names have disappeared, to be replaced by Wells Fargo, TD Bank, South State, PNC Bank, Ameris Bank, BNC Bank and, who can forget, Bank of the Ozarks. The score: nine banks gone and seven new names on the front door. We replaced seven “community banks” with at least four “new” banks, each with assets in excess of $10 billion — hardly “community banks.”

This suggests that the biggest American banks are getting bigger while community banks, hardly bad actors in the financial crisis, are bearing much of the pain. Dodd-Frank’s unintended consequence is that “too big to fail” banks, those banks best equipped to deal with the act’s greater regulatory costs and demanding criteria, are growing at the expense of community banks.

Why should we care? The answer is that community banks have traditionally served local businesses by making loans based on past experiences and performances, personal relationships and reputation. Numbers are always important, but at today’s banks they have largely replaced these other factors in the loan underwriting process.

If Dodd-Frank weren’t enough of a burden on community banks and local borrowers, the recent adoption by U. S. financial regulatory authorities of the Basel III international capital adequacy standards may make access to credit even more difficult. For background, in Europe and much of the world, each country has a handful of national banks and a small group of “specialty” banks serving niche markets. Most loans are made by the big banks. By contrast, the United States banking system is still made up of 6,518 banks ranging in asset size from J.P. Morgan/Chase at $2.1 trillion to Emigrant Mercantile Bank, also in New York City, with assets of $3.6 million.

Basically, Basel III requires many banks to increase the amount of capital — relatively liquid assets — they set aside for every dollar they lend. That means that if the bank’s liquid assets are fixed, but the assets reserved for each dollar loaned has to increase, the amount of loans has to decrease.

How does this impact community banks and loans to small businesses and consumers? Community banks often have difficulty in increasing their liquid assets, particularly if their operating costs — including regulatory costs, such as the costs of Dodd-Frank compliance — are growing disproportionately. Big banks obviously have regulatory costs, too, but as they acquire smaller banks and grow their assets, their regulatory costs usually do not grow proportionately.

To think that one size fits all in the U.S. banking industry is simplistic, if not outrageous. The end result of excessive regulation, however well intentioned, will be community banks extending fewer loans and at higher prices. Loans for land development, expansion and working capital lines of credit for small business will be increasingly difficult to come by.

It was important that our nation take steps to avoid another financial meltdown like the one experienced in 2008, but it also is important that we preserve community-based entrepreneurialism and community banking in the United States. Let’s not throw the baby out with the bathwater.


Elihu Spencer is a local amateur economist with a long business history in global finance. His life’s work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable but the accuracy cannot be guaranteed.