On his Treasury Department weblog (?!?) Deputy Treasury Secretary Neal Wolin explains the benefits Dodd-Frank provides community banks:
Wall Street Reform helps level the playing field between large banks and small ones, helping to eliminate distortions that previously favored the biggest banks that held the most risk. The Dodd-Frank Act subjects big banks to much higher standards than small banks in a number of areas:
· Tough new capital and liquidity requirements to reduce the risks presented by the biggest Wall Street firms do not apply to community banks. In fact, the law largely exempted about 7,000 community banks and thrift institutions, nearly all of which hold less than $10 billion in assets and a third of which hold less than $100 million, from these requirements.
· Wall Street Reform requires the biggest institutions to pay a larger share of the cost of deposit insurance protection, reflecting the greater risk they pose to the financial system.
· Wall Street Reform strengthens protections for one of community banks’ core sources of funding by raising deposit insurance protection from $100,000 to $250,000.
Wolin is being highly selective! Among the other blessings Dodd-Frank provides, he forgets to mention, for instance, the new regulatory infrastructure most small banks will have to install to carry out the 4,000 or so pages of new rules the law will spawn. What will be a minor inconvenience at big banks (who already have bloated compliance departments) becomes a crushing new cost burden at small ones. And he forgets to mention, too, the Durbin Amendment. Small banks are supposed to be exempt from Durbin, of course, but they know they’ll have to price interchange by it anyway if they want merchants to accept their debit cards. Also, the repeal of Reg Q (which prohibited interest payments on business accounts) will add to small banks’ cost of deposits.
There’s more, but you get the picture. In fact, Dodd-Frank is a disaster for small banks—and for the Treasury Department to argue otherwise is pure chutzpah. The law adds so many new costs that, by common consensus (which I agree with), banks with less than $500 million in assets are simply no longer economically viable, and will feel pressure to sell out—probably at a semi-fire-sale price. Banks above $500 million will see their profitability permanently dented. That’s not good for credit creation for small business, or good for the economy generally. And it’s a high price for these institutions to have to pay, especially since they didn’t cause all the problems in the first place.