A report issued by the White House Council of Economic Advisers entitled, “The Performance of Community Banks Over Time,” purports to debunk the popular notion that Dodd-Frank regulations have hindered community bank lending. Community banks are those with assets of $10 billion or less, and are typically locally owned, medium and small depository institutions that engage in localized banking activities. The report summarizes data that show lending by community banks with assets between $1 billion and $10 billion has rebounded as strongly since 2010 as lending by big banks. This is true whether lending is examined by the rate of growth in assets or loans. Moreover, the report concludes that reforms passed in the Dodd-Frank Act have actually helped community banks by neutralizing some cost advantages that favored larger banks due to their larger scale. The Act did so by:
- Raising FDIC coverage to $250,000 per account from $100,000, which helped community banks attract more deposits to expand lending.
- Redesigning insurance assessments and increasing the size of the deposit insurance fund in a way that forces large banks to bear costs proportional to their larger level of risk.
- Using capital and liquidity requirements to ensure that the costs of proprietary trading fall to the larger banks that typically engage in the practice, thus reducing some of the advantage in financing costs that they may have held in the past relative to small banks, who depend on deposits to finance loans and are less likely to engage in risky trades with bank capital.
The only section of community banks in which lending growth has not recovered since 2010 is limited to only those banks with less than $100 million in assets. But this is the result not of Dodd-Frank regulatory burdens, but rather on an M&A trend going back to 1994 that has resulted in significant consolidation in the sector. The report concludes that the Obama Administration is taking important steps to streamline and tailor Dodd-Frank regulations in a manner that minimizes the impact to healthy community banks that create little systemic risk.
But the White House’s rosy portrayal of the community banking sector – as well as its self-congratulatory tone – must be small succor to community bank executives struggling to maintain their margins in the post Dodd-Frank regulatory environment. Critically, the report omits any discussion of Return on Assets (ROA) for the vast majority of community banks, those with assets between $1BN and $10BN. In addition, the report’s conclusions regarding the rebound in growth rates really is not complete without an analysis of what rates of growth in assets and loans community banks could have achieved but for Dodd-Frank compliance burdens.