The House Committee on Oversight and Government Reform will hold a hearing on Thursday to discuss the regulatory burdens of The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) on community banks. As I plan to testify at that hearing, community banks provide vital financial services to millions of Americans who may otherwise lack meaningful access to credit. Ensuring that they are regulated appropriately, not regulated out of existence, should be a bi-partisan priority.
Generally speaking, community banks offer traditional depository, loan, and trust services and operate in limited geographic areas. The median American bank has assets of $165 million and just 39 employees. Although community banks collectively hold only 14.2 percent of all banking institution assets, they play an outsized role in most categories of financial services that matter to individual consumers. Community banks provide nearly half of small-business loans and farm loans, more than one-third of commercial real estate loans, and 16 percent percent of residential mortgage loans. Community banks are particularly important to rural America. They are the only financial service providers available to more than one-third of American counties.
Any discussion of regulatory burden is incomplete without examining both the costs and the benefits of the specific regulation.
The regulatory framework for financial institutions in the United States, including many provisions of 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." Applying Dodd-Frank to community banks accomplishes neither. 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. More significantly, 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 cousins. This unjustified imposition of regulatory burdens on community banks 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 the standardization of financial products, leaving millions of vulnerable borrowers without meaningful access to credit.
Financial activities that are fundamental to the average American are only worth the time of a mega financial institution if they are completely standardized product and if the borrower is a completely standardized borrower. There is no negotiating terms and there is little room for explanation for why a particular borrower has an unusual story. You either fit in the box or you don't. As a result, millions of Americans are left out of that box altogether. Approximately 1 in 4 American households are either "unbanked," meaning they lack a checking or savings account, or "underbanked," meaning they rely on alternative financial services like payday loans in addition to a traditional bank account. The unbanked and underbanked typically bear far higher costs than those fully served by banks and find it much more challenging to fully participate in the economy. As standardization increases through the well-meaning efforts of the Consumer Financial Protection Bureau and other Dodd-Frank reforms, more Americans will be left out of the box and will join the ranks of the unbanked and underbanked.
Much remains to be settled under Dodd-Frank, which means that there is still opportunity to reassert the value of community banks to the American consumer and the American economy and to work to maintain the viability of the community banking model within the Dodd-Frank framework.