Dodd-Frank Law Threatens Small Banks

The LIBOR rate-fixing controversy and JPMorgan Chase’s failed trades are all spun as reasons why we need Dodd-Frank, the so-called “financial reform” law that was signed into law two years ago on July 21.

But where the 2,600-page law is having the most significant impact — and a very negative impact — is not in London and New York, but on community banks in Georgia, Texas, and all across Main Street USA.

Yesterday, the House Financial Services Subcommittee on Oversight and Investigations heard from Jim Purcell, chairman and CEO of the State National Bank of Big Spring in rural west Texas, on how Dodd-Frank has limited the services his bank can offer — to the benefit of big bank rivals.

Similarly, a recent study I authored that was published by the Competitive Enterprise Institute (CEI) and the Georgia Public Policy Foundation shows how the Dodd-Frank’s Durbin Amendment price controls on the debit-card interchange fees that banks can charge retailers are devastating local banks in the Peach State.

My study on Georgia, which has been the subject of informative articles from TheStreet.com to the Atlanta Journal-Constitution to the Marietta Daily Journal, details how the Durbin price caps have slashed revenue both at Georgia’s larger banks like SunTrust and Synovus, as well as at community banks technically subject to an exemption.

In a similar vein, Purcell, a co-plaintiff with CEI in a lawsuit against many of Dodd-Frank’s provisions and against the “recess” appointment of Richard Cordray to head the massive Consumer Financial Protection Bureau, will detail how the law has cost his community bank and limited the services it can provide its customers.

In his written testimony (already on the committee’s website), Purcell goes over how the bank had to eliminate wire transfer services and many types of stable mortgages because of the length and complexity of the Dodd-Frank rules.

“In fact, big banks — the very banks at the center of the problems that spurred the enactment of Dodd-Frank — are among the new law’s great beneficiaries, precisely because they can much more easily shoulder Dodd-Frank’s compliance burdens,” Purcell says. “Big banks have armies of lobbyists, lawyers, consultants, and compliance staffers, without denting the banks’ profitability.

"Community banks, by contrast, lack those resources, and every extra dollar of compliance costs is one less dollar to spend on customer service, one more dollar of cost that ultimately must be passed through to customers.”

In a forthcoming study, CEI Vice President Wayne Crews estimates that Dodd-Frank costs the U.S. economy almost $90 billion a year, a cost that will almost surely rise as more of nearly 400 rules are implemented.

To smaller banks and credit unions, Dodd-Frank sends a blunt message. To paraphrase a passage from President Obama’s recent stump speech, the 2,600-page law says to them, “Don’t build that. Let somebody else make it happen.”

John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. He is the author of the book “Eco-Freaks.” Read more reports from John Berlau — Click Here Now.