The impact of Dodd-Frank on community banks

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Article Highlights

  • Community banks play a vital role in this nation's economy.

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  • Although policymakers enacted Dodd-Frank to avoid too-big-to-fail situations, in reality, its effect is the opposite.

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  • More than 16 million Americans would have severely limited banking access without community banks.

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Key Findings

  • The purpose of the Dodd-Frank Act was to protect consumers and the stability of the financial system. Community banks provide vital services to millions of Americans, many of whom would be underserved if the community bank model were broken or if community banks were to abandon lines of service. If community banks are forced to merge, consolidate, or go out of business as a result of Dodd-Frank, one result will be an even greater concentration of assets on the books of the "too-big-to-fail" banks. Another result will be that small businesses and individuals who do not fit neatly into standardized financial modeling, or who live outside of metropolitan areas served by larger banks, will find it more difficult to obtain credit. Neither of these outcomes will protect consumers, the financial system, or the recovery of the American economy.
  • Community banks play a vital role in this nation's economy, particularly with respect to small businesses and rural communities, and their continued health and vitality is central to the nation's economic recovery. Community banks provide 48.1 percent of small-business loans issued by US banks, 15.7 percent of residential mortgage lending, 43.8 percent of farmland lending, 42.8 percent of farm lending, and 34.7 percent of commercial real estate loans, and they held 20 percent of all retail deposits at US banks as of 2010.
  • Community banks are a vital source of credit and banking services to rural communities. Community banks are four times more likely than large banks to have an office in rural counties. More than 1,200 US counties--with a combined population of 16 million Americans--would have severely limited banking access without community banks.
  • Community banks were not responsible for the causes of the financial crisis determined by the authors of Dodd-Frank. Community banks did not engage in widespread subprime lending. They did not engage in securitization of subprime residential mortgages. Nor did they use derivatives to engage in risky speculation to maximize return. Community banks simply did not contribute to the financial crisis.
  • Although policymakers enacted Dodd-Frank to avoid too-big-to-fail situations, in reality, its effect is the opposite. The act will force greater asset consolidation in fewer megabanks by increasing the competitive advantage large banks have over smaller banks.
  • Dodd-Frank will make it harder for community bank customers to obtain loans because it encourages financial product standardization, which undermines the relationship banking model and decreases the diversity of consumer banking options. As a result, credit and banking services will be eliminated or become more expensive for small businesses, those living in rural communities, and millions of "informationally opaque" American consumers and businesses that are challenging or less profitable for large banks to serve.
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About the Author

 

Tanya D.
Marsh
  • Tanya D. Marsh is an adjunct scholar at the American Enterprise Institute (AEI), where her work focuses on banking regulations and the impact of Dodd-Frank. In 2013, she coauthored an AEI study titled “The impact of Dodd-Frank on community banks.

    Marsh is also an associate professor of law at Wake Forest University School of Law in Winston-Salem, North Carolina. Before teaching at Wake Forest, she was an adjunct professor of law at Indiana University School of Law, clerked for the Indiana Supreme Court, and practiced commercial real estate and corporate law.

    Marsh has a law degree from Harvard Law School and a bachelor’s degree in history and political science from Indiana University Bloomington. She was also a Jane Addams Fellow at the Center of Philanthropy at Indiana University.

  • Phone: 336.758.6059
    Email: marshtd@wfu.edu

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