Regulatory burdens always fall more heavily on small banks than large ones, but sloppy practices and over-eager legislators make the problem particularly severe.
In a recent op-ed, Mercatus Center senior research fellow Hester Peirce said the Dodd-Frank Act has made clear that, “Regulatory burdens allow big banks to flourish at the expense of their smaller competitors.”
“There is nothing wrong with big, established banks gaining market share because they offer the mix and quality of products and services that customers want,” she wrote, but “there is something wrong … with these large banks beating off their smaller, newer rivals with a club fashioned by Washington legislators and regulators.” (RELATED: Study: Dodd-Frank Crushes Small Banks)
Peirce told The Daily Caller News Foundation on Wednesday that the problem is caused by a combination of insufficiently rigorous regulatory processes, ignorance of the specialized role that many small banks play, and simple economies of scale.
“Standardized models work great for large banks and regulators,” she explained, but “one of the great things about the American banking system is that it is diverse, [and] when you homogenize banks, that is not a good thing.”
She noted that, “small banks have been making loans to small businesses for years” without help from federal regulators, but are now having to turn loyal customers away because they do not meet the stringent standards set forth in Dodd-Frank. (RELATED: Dodd-Frank a Total Failure, Bipartisan Panel Agrees)
Although a community banker may know, for instance, that a certain individual is a safe credit risk based on experience, the bank might nonetheless be prohibited from approving the loan under Dodd-Frank if the borrower lacks the requisite income, collateral, etc.
More broadly, Peirce said, “there is so much regulation now that even when small banks are exempt from them, they have to spend a huge amount of time looking through the regulations just to find out that they are exempt.”
Lacking the resources that larger banks have to hire armies of lawyers to help them understand and keep current on regulations, executives at community banks are spending an inordinate amount of their time performing those tasks themselves. And as Peirce pointed out, “bankers did not go into banking in order to become regulatory lawyers.”
On top of the sheer volume of new regulations, Peirce claimed that many of them are of decidedly poor quality, lacking even a rudimentary cost-benefit analysis, because “financial regulators are independent regulatory agencies, which means they are not subject to an executive order requiring other agencies to do economic analysis.” (RELATED: Dodd-Frank Makes Future Taxpayer Bailouts More Likely)
“They talk the talk and say that they do cost-benefit analysis,” she said. “But when it comes to showing their work, it’s really difficult to see how they have done so. If they are doing the analysis, then they aren’t using it.”
“In one case, an analysis was conducted, but it was not released until several months after the rule was finalized.”
Unless financial regulators and lawmakers start embracing sober analysis rather than knee-jerk reactions, Peirce said she worries “that their rules are going to create another financial crisis.” (RELATED: Warren Accused of Clinging to Dodd-Frank at Expense of Middle Class)
“You can’t just adopt any rule and say it will prevent a financial crisis,” she argued. “You have to actually show that it does.”
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