WSJ: Dodd-Frank’s Effect on Small Banks is Muted; Law has raised costs, but by some measures community banks are quite healthy; low interest rates pose bigger hit to profits, observers say

Despite complaints from some that Dodd-Frank has led to the closing of community banks, the Wall Street Journal reports something different here. Some excerpts:

It's a favorite lament of community banks: The 2010 Dodd-Frank law is squeezing small financial firms and crimping access to credit for Main Street, all in the name of protecting the country from another financial crisis.

A look at the data shows the reality is more complicated, and small banks are proving surprisingly resilient by some measures.

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There's no doubt Dodd-Frank has disproportionately raised compliance costs for small banks, which don't have the size and scale to absorb new costs as easily as larger firms, though exact tabulations are hard to come by. But in some ways, community banks are the picture of health.

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In the second quarter, the profitability of small banks–which earned a 0.95% return on assets–barely lagged behind the 1.08% return of the big banks, according to the FDIC. That's a big change from the margin when Dodd-Frank passed, when the gap was more than three times as wide.

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The number of community banks has been falling for decades. Although the decline accelerated over the past 10 years, in part because of the wave of bank failures during the financial crisis and tighter regulatory restrictions on new bank formation, almost two-thirds of banks that closed were bought by other community banks, according to the FDIC.

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