FrankenDodd’s Collateral Damage: Banks Too Small To Succeed

Posted on by Phil Querin

BullyAs readers of this site know, I have no love lost for the Dodd-Frank Act.  To review my prior rants, go to posts here and here. The gist of my objection to the law is that it casts too wide a net.  It was created by politicians, bureaucrats, and regulators that had no real idea how it would be implemented. This is because they neither understood nor cared about implementation. To them, that issue would be worked out during the administrative process, which they regarded as mere details for underlings. But as we know, details are where the devil resides….

The result is that virtually everything with a dollar sign in front of it and a consumer behind it has become subject to the type of probing scrutiny that would make a proctologist proud.  And notwithstanding the fact that it was Big Bank BS that resulted in this country’s fiscal near-death experience, Dodd-Frank regulates far more than the perps. In fact, in a predictable, but little discussed irony, it is the Big Banks that stand to benefit most from the uber-regulatory environment created by Dodd-Frank.  Why?  Because the small local and regional banks and credit unions that have all fallen under the shadow cast by this Leviathan, can ill-afford to hire all the personnel needed to ingest, interpret and implement the thousands of pages of administrative rules.

This gives the Big Banks a distinct competitive advantage.  So in a perverse twist of fate, the result is that we now have a regulatory net that ensnares the little fish and lets the big fish go free.

In an April 2, 2014 Wall Street Journal article (“Small Banks Look to Sell as Rules Bite”) the consequence of Dodd-Frank is being felt not by the intended targets, but the unintended targets.  Herewith, some points from the article:

In a period when low interest rates are squeezing small banks, the costs of adhering to new regulations are taking a toll. Executives from at least a half-dozen small banks that have agreed to be acquired in recent months said the increasing regulatory burden was a factor in their decisions.

The executives said the new rules aren’t scaled for banks of their size. While the Dodd-Frank financial-overhaul law and other new rules were aimed at reducing the problems caused by big banks, small banks must deal with many of them as well, and the costs don’t necessarily get lower as the banks get smaller.

“When they created ‘too big to fail,’ they also created ‘too small to succeed,'” said Dan Baird, chief executive of Capital Funding Group Inc., which last October sold its CFG Community Bank, a Maryland bank with $481 million in assets, to MVB Financial Corp.

The moves come as a sluggish economic expansion limits banks’ ability to expand enough to absorb higher costs. That is pushing some bank executives to look to sell. In all, there were 204 bank mergers in 2013 in which the target bank had less than $1 billion in assets, according to financial-research firm SNL Financial.

To be sure, in most bank sales there are several factors at play. Still, higher regulatory expenses are weighing heavily. A paper last May from officials at the Federal Reserve Bank of Minneapolis said a third of the smallest banks, those under $50 million in assets, could become unprofitable if they had to hire just two additional compliance employees.

Many bankers think smaller banks now must have at least $1 billion in assets to cope with the increased regulatory burden.

Conclusion. Swell, great job! The result is almost formulaic:

  • First, the Big Banks cause the financial crisis;
  • Next, the politicians scratch their collective heads and hold hearings, asking Deep Questions written by their legislative interns;
  • Then come the chief regulators, à la Alan Greenspan, to publicly explain that the crisis could not have been foreseen;
  • Then come more politicians [like salesmen hyping fire retardant after the conflagration has gone out], rushing to enact laws with their names attached;
  • Next, the regulators, bureaucrats, lobbyists and interest groups convene to write rules implementing the bills the politicians attached their names to – but likely didn’t read;
  • And Voilà! We get a one-size-fits-all law that has the effect of preserving “Too Big to Fail” which results in creating “Too Small to Succeed.”

Congratulations to every chef who spoiled the broth!

Posted in Dodd-Frank, Federal Regulation, Financial Crisis, Miscellany, Q-Rants | Tagged , , ,
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