Over two years ago, we posted a link to an opinion piece by former Senator Christopher Dodd, which responded to common criticisms of the Dodd-Frank financial reform legislation, including the criticism that the law's allegedly excessive regulation will harm small, "community" banks. Now, law professor Tanya Marsh and Joseph Norman have written The Impact of Dodd-Frank on Community Banks, which concludes that the law will, in fact, harm community banks and, in turn, consumers. Here is the abstract:
The
regulatory framework for financial institutions in the United States,
including many provisions of The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank), impose significant costs on
community banks without providing benefits to consumers or the economy
that justify those costs. The stated purpose of Dodd-Frank was to
prevent another financial crisis by enhancing consumer protection and
ending the era of "too big to fail." However, the application of
Dodd-Frank to community banks is misplaced. Community banks did not
cause the financial crisis. The relationship-banking business model and
market forces protect the customers of community banks without the need
for additional regulation. Dodd-Frank builds on decades of "one size
fits all" regulation of financial institutions, an ill-conceived
regulatory framework that puts community banks at a competitive
disadvantage to their larger, more complex competitors. The imposition
of regulatory burdens on community banks without attendant benefits
ultimately harms both consumers and the economy by: (1) forcing
community banks to consolidate or go out of business, furthering the
concentration of assets in a small number of mega-financial
institutions; and (2) encouraging standardization of financial products,
leaving millions of vulnerable borrowers without meaningful access to
credit. Neither of these outcomes will protect consumers, the financial
system, or the recovery of the American economy.
