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American Enterprise Institute paper: Dodd-Frank may exacerbate “too big to fail” problem

aeiA recent paper from the American Enterprise Institute found that while Dodd-Frank was designed to eliminate America’s “too big to fail” problem, struggling credit unions could be put out of business, thereby exacerbating the problem.

If community banks are forced to consolidate, go out of business or merge, the assets of the banking industry could become more heavily concentrated on the books of America’s “too big to fail” banks, and consumers who live in small or rural communities may find it harder to obtain credit.

Community banks provide 48.1 percent of all small-business loans, 15.7 percent of residential mortgages, 43.8 percent of farmland loans, 42.8 percent of farm loans and 34.7 percent of commercial real estate loans. As of 2010, community banks hold 20 percent of all U.S. bank deposits.

The Dodd-Frank Act has been criticized for the compliance burden it places on smaller community institutions, which often lack the resources and staff necessary to come into full compliance with the law. Between 1985 and 2010, the number of banks with assets of less than $100 million fell by more than 80 percent, while the number of banks with assets of more than $10 billion nearly tripled.

In September, Missouri-based Shelter Financial Bank, a $200 million community bank, was shut down by its owners, who cited an additional $1 million in Dodd-Frank compliance costs as the reason for the closing.

“It was going to cost more than what we got out of the bank,” a bank official said.

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