Killing Community Banks

After the credit crisis of ’08/’09, Americans decided they didn’t like banks. Ever willing to oblige, politicians highjacked the populist uproar and created a behemoth of a regulatory morass, called Dodd Frank. If your community bank has closed its branch near you or completely merged out of existence, you can blame Dodd Frank. If your community bank still exists, just wait a while, and very possibly, it won’t.

Community banks had nothing to do with the credit crisis. They are less leveraged than big banks. They are less profitable than big banks – except during the crisis itself when big banks collapsed and small banks sailed through relatively well. They serve small populations – towns with farmers for instance – where often there is no other choice. They will make loans because they know you; large banks make loans that fit in their numerical parameters. They don’t know anything about you, except what their computer profiles tell them you should look like.

Community banks have tight underwriting standards, and in many categories, lower loan charge offs than big banks. Even though community banks make up a smaller share of the overall banking market than other banks, they make over 50% of small business loans, and over 50% of agricultural loans.

Before the credit crisis, small banks were losing market share, albeit slowly. After Dodd Frank passed, in just a few years, community banks’ share of banking assets has shrunk by 12%, a huge decline in a short time. Consolidation – which means mergers – has ramped up. While you thought bank failures ended shortly after the crisis, that hasn’t been true for small banks. From 2010 through 2014, 338 community banks have failed.

The beneficiaries of these market share losses are, of course, big banks. In the effort to ‘punish’ the banks for the credit crisis we have effectively hollowed out the best of the banking business, and made the perpetrators even more successful.

Dodd Frank is over 2200 pages long. Its regulations were set to evolve over years, serving up an incredibly complicated, ever-changing banking environment. When JP Morgan needs to hire 5000 compliance personnel, it is annoying, but JP Morgan will survive. When Bank of Anytown must hire even one compliance attorney – if it can even attract one – the cost can be enough to put it under. Furthermore, compliance personnel do not make loans or get to know borrowers.

The aftermath of the credit crisis has caused a big chill, not just in banking. What we have set forth here can be multiplied over many other industries, as regulations have skyrocketed in the last few years. Some are simply impossible to comply with. All fall hard on small business. We reap what we sow, and that has been a very slow recovery in employment, and virtually no income growth. Perhaps America has decided she wants the ‘bigger is better’ approach, because that’s certainly the trend.