Small Banking Institutions Struggle Under the Dodd-Frank Act


In 2010, following a financial crisis fueled by irresponsible lending practices, reckless risk management, misguided government policies, and the collapse of the housing bubble, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, a massive 2,300-page overhaul of financial regulation. It is the longest and most complicated bill ever signed into law.

The law’s purpose was to end “too big to fail,” avoid future bailouts, restrict Wall Street’s dangerous behavior, and promote financial stability. President Obama assured the public that the legislation would “lift our economy” and now-Senator Elizabeth Warren promised that it would “increase accountability in government.” Yet despite these stated goals, the banks deemed too big are 80% bigger than before the banking crisis of 2008 and the six largest U.S. financial institutions now have combined assets of about $10 trillion, amounting to almost 60% of GDP.

Rather than limit the growth and instability of large financial institutions, Dodd-Frank has devastated small banks and credit unions that Maine businesses rely on for credit. Last year, in an interview with Mainebiz, Christopher Pinkman, President of the Maine Bankers Association, identified regulatory relief as a major concern for the banking industry and said that “[Dodd-Frank has] made running a financial institution much more expensive.” Research by the American Legislative Exchange Council found that Dodd-Frank created “huge government bureaucracies that have slowed economic growth and harmed small businesses. The scope of Dodd-Frank’s red tape has ensnared banks in a regulatory web that continues to stifle innovation and economic recovery. The law is so convoluted that the average compliance cost is now 12 percent of a bank’s operating costs and can be more than double that amount for smaller institutions.”

The regulatory costs are crippling small banks, which have shrunk by 19 percent in total assets since the law’s passage. The disappearance of so many small institutions reduces consumer choices and decreases competition, which adds additional banking costs and hassle to people seeking to receive loans. According to the Federal Deposit Insurance Corporation, no banks in Maine hold assets in excess of $10 billion, and nearly half have between $250 million and $1 billion in assets. No new banking institutions have opened in Maine in the last three years. Representative Bruce Poliquin (R–2nd District) has urged Congress to reform Dodd-Frank regulations. “Our community banks and credit unions are the backbone of our economy. They want to be able to lend money to Mainers who are interested in purchasing a new truck or putting a new engine on a lobster boat but they are unable to because of Dodd-Frank’s net of regulations,” he wrote last year.

The American Action Forum has found that the law will reduce economic growth by $895 billion over ten years and compel businesses to spend more than 12 million hours on paperwork annually. Large institutions like JP Morgan – which hired more than 10,000 employees to oversee compliance – are able to absorb the staggering costs; many small banks cannot.

According to several researchers at Harvard University, the federal government should expand the regulatory exemptions for small banks and establish a bipartisan commission to look for opportunities to streamline and simplify regulations for small banks, which are faced with unduly burdensome oversight.

For more information on burdensome state and federal-level regulations that lawmakers have passed over the years that hold back Maine’s economic growth, click here.