The Dodd-Frank Act is impairing community banks’ ability to serve customers and local communities as they struggle to manage an overwhelming amount of new rules, according to bank experts.
The American Bankers Association recently released a document detailing the impact that heightened regulatory pressures are having on small banks.
The new rules, according to the ABA, create pressure to hire additional compliance staff and force smaller banks to spend more on lawyers, which reduces resources that could be directly used for serving banks’ customers and communities.
Community banks in particular are struggling to comply with the law’s risk retention provision, which requires banks to hold capital against loans at a time when additional capital is hard to come by, forcing smaller banks to originate less mortgage loans.
Higher capital requirements and narrower qualifications for capital also harm community banks’ chances to attain new shareholder investors.
The compliance costs for registration to serve local municipalities, which are already subject to oversight by primary regulators, are an additional burden for small banks.
Another expense the law adds to small banks are new derivatives rules that make it much more expensive for banks to offset their loan exposures to customers, industries, lines of business, interest rates, credit default and other risks through the use of derivatives, according to the ABA.
The Federal Deposit Insurance Corporation recently announced that it will use authority given to it under Dodd-Frank and will double the size of the Deposit Insurance Fund, which will eject as much as $50 billion out of the earnings and capital from the banking industry.
The ABA said the law has resulted in over 3,900 pages of rules, which, laid end-to-end, would be nearly three times the height of the Empire State Building.