Former FDIC Chairman Isaac: Dodd-Frank could shut down many community banks

Bill Isaac

Bill Isaac, the former chairman of the FDIC, said on Wednesday that Dodd-Frank financial reforms could put almost 50 percent community banks out of business.

“The bigger banks can absorb it, the smaller banks can’t,” Isaac, the present chairman for Fifth Third Bancorp, said, according to CNBC. “I would not be surprised to see half of the community banks in this country go out of business if we don’t give some relief from Dodd-Frank for them.”

Many critics of the Dodd-Frank reforms have voiced concern about the regulatory burden that the legislation places on smaller community banks. On Wednesday, Federal Reserve Chairman Ben Bernanke sought to address the concern surrounding Dodd-Frank’s impact on community banks.

“We will work to maintain a clear distinction between the community banks and larger institutions in application of the new regulations,” Bernanke said in prerecorded remarks played at a community bankers convention, CNBC reports.

Isaac, however, maintains that Dodd-Frank is just too heavy for smaller banks.

“I think that Dodd-Frank is a terrible piece of financial legislation,” Isaac said, according to CNBC. “It didn’t address any of the causes of the crisis that we just went through. It won’t prevent the next crisis. It’s heaped volumes and volumes of regulations.”

Isaac also criticized the Federal Reserve’s latest bank stress tests. Under the stress tests, banks are required to raise capital or slow growth during a hypothetical economic crisis, which Isaac claims many banks are now in the process of doing.

“What they’re missing here is that when you require banks to capitalize for a depression, it’s going to be awfully hard to get this economy moving,” Isaac said, CNBC reports.

The increased regulations have also led to tightened lending standards, even though many banks have excess capital at present.

“Loan growth has almost been non-existent for the past three years,” Isaac said, according to CNBC. “It’s hurting the people who need the money the most. It’s hurting small business. I think it is impeding economic growth.”

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