2019 Journal of Community Bank Case Studies

2019 COMMUNITY BANK CASE STUDY COMPETITION

Passed by Congress in 2010, the Dodd-Frank Act is 2,223 pages and includes 398 rules, with only 39% of the rules finalized as of September 2013 (Koch 55). Dodd Frank was created to reign in the largest systemically important financial institutions but applied to community banks as well. There were many unintended consequences on community banks. This legislation, the largest since the post-depression Glass-Steagall Act, included provisions that resulted in the following consequences for community banks: • Stricter regulations • Increased compliance costs leading to lower profit margins • Decreased loan revenue and constrained mortgage availability to consumers • Increased regulation and oversight in the OTC (Over the Counter) Derivatives Market • The Volcker Rule prohibited banks from certain types of trading (Congressional Research Service, The Dodd Frank Wall Street Reform and Consumer Protection Act: A Summary ). U.S. Representative Andy Barr of Kentucky’s 6th Congressional District recognizes that banking legislation was necessary at the time, but that Dodd-Frank may have gone further than necessary. “Dodd-Frank put one-size-fits- all regulation on all banks, regardless of size. All that created unintended consequences of making big banks bigger, small banks fewer, and depriving the American people of access

to financial services and products.” While he concedes that banks are far better capitalized than they were 10 years ago, he says that Dodd- Frank was “the wrong solution for an important problem” (Barr). The larger banks were able to reallocate resources to comply with the stricter regulations and absorb some of the extra costs. It was the smaller banks with smaller budgets that were the most negatively impacted by the original Dodd Frank Act. A 2015 Harvard study conducted by Marshall Lux and Robert Greene entitled The State and Fate of Community Banking states that community banks survived the financial crisis with large but not detrimental losses, but shed 6 percent of U.S. banking asset share between 2006 and 2010. This study also found that since Dodd-Frank’s passage, the share of assets of community banks fell by more than 12 percent (Lux and Greene 3). Scott Beyer, owner of The Market Urbanism Report, wrote an analysis on the study in Forbes, suggesting that “compliance costs disproportionately hurt” these smaller banks. His research suggested that larger institutions were more prepared financially and beyond to comply with changes in regulation while community banks lagged and faced higher average costs (Beyer). In his March 2018 address to congress, Senate majority leader Mitch McConnell (KY) stated that compliance costs have risen to 24% of banks’ net income since the Great Recession (McConnell, 00:01:18 - 00:01:35) and that deposits in community banks decreased by nearly one-

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