Tag Archives: bank regulation and small banks

Too big to be the cause….
3 1/2 cheers for Peter Wallison

For nearly seven years, analysts have run circles around the bailout of large banks, automakers, and other firms deemed too big to fail during the 2008 financial crisis.

And while no one denies the economic importance of these institutions, it may be that when it comes to understanding the U.S. economic malaise in the years since, these actors are, in a sense, “too big to be the cause” as well.

That’s the conclusion we’re coming to based on the work of economist Peter Wallison in his persuasive book, Hidden in Plain Sight. (Reviewed here by The Wall Street Journal.)

A more likely culprit is the fate of small- and medium- sized banks over the same time period, under the disproportionately large burden imposed on them by the 2010 Dodd-Frank Act.

It’s a classic truism that smaller institutions have higher average costs dealing with regulation. They must meet the fixed cost of dealing with all those rules and bureaucrats just like any large bank. But they may not spread the overall cost efficiently over a balance sheet in the billions or trillions…

Furthermore, small businesses still (at least up until this recovery) account for an estimated 80-90 percent of new jobs.

And, because they come nowhere close to meeting the capital requirements for listing on a stock exchange or even for most private offerings, small businesses are almost completely reliant on banks for their financing needs.

Hence the squeeze placed on smaller financial institutions is especially painful to growth and opportunity, a double whammy.

It’s an important topic, one we keep coming back to because it’s so near and dear to the Freedman’s Mission.

Dodd-Frank’s continuing Legacy

It is now five years since President Obama signed the Dodd-Frank Act, continuing the work begun by the bank bailouts of 2008-2009 –

which critics argue includes putting the squeeze on small banks and the small- and medium-sized firms that used to rely on them.

“Dodd-Frank’s backers in Congress and other members of the left touted the regulation as a means of helping Main Street over Wall Street,” writes Carrie Sheffield in Forbes
“Yet the number of community banks fell by 40 percent since 1994, and their share of U.S. banking assets fell by more than half – from 41 percent to 18 percent.

“In contrast, the biggest banks saw their share of assets rise from 18 percent to 46 percent. And while the number of community banks already declined before the crisis, since the second quarter of 2010 – Dodd-Frank’s passage – community banks have lost market share at a rate double what they did between Q2 2006 and Q2 2010: 12 percent vs. 6 percent.”

Dodd-Frank’s regulatory burdens, another critic argues, “are driving consolidation, and could result in lending markets less able to serve core economic demands.” Particularly troubling, according to lead author Marshall Lux, a senior fellow at HKS’s Mossavar-Rahmani Center for Business and Government and senior advisor at The Boston Consulting Group, “is community banks’ declining market share in several key lending markets, their decline in small business lending volume, and the disproportionate losses being realized by particularly small community banks.”