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Small banks concerned about “Walmartization” of banking under Dodd-Frank

John Howe

John Howe

Some bankers have indicated concerns recently regarding the 2010 Dodd-Frank Act’s effect on small banks, particularly the possibility of the “Walmartization” of consumer banking.

“In mid-Missouri, generally, I think we’ll probably see some smaller banks acquired by bigger banks, first of all,” John Howe, the chairman of Missouri Bankers and a professor of finance at the University of Missouri, said, according to Columbia Business Times. “Second of all, I think it’s going to have a somewhat depressing effect on the profitability of banks and their overall financial health.”

Callaway Bank President and CEO Kim Barnes said that community banking will always have a place in the banking industry, even in the face of consolidation, though nobody knows how much consolidation will take place.

“Do I think it will be more difficult?” Barnes said, Columbia Business Times reports. “Yes. There is a certain size and scale that [banks] simply will have to get to in order to handle the new changes, and a little community bank that has one branch in one location in a small town will likely struggle to survive on its own.”

Congress passed the controversial Dodd-Frank Act in 2010, which was intended to reduce risks and improve transparency in the U.S. banking system after the 2008 financial crisis.

“The notion was that the regulation was either wrong or too small, and that led to the crisis that started in 2008,” Howe said, according to Columbia Business Times. “However, the financial crisis was largely brought on by the large global banks, and yet all banks have kind of been painted by that brush.”

The Volcker Rule, a contentious provision of Dodd-Frank, prohibits banks from engaging in proprietary trading—or risky investments with client funds.

“The very largest banks engaged in some speculative trading with their own money,” Howe said, Columbia Business Times reports. “When that turned bad, then the bank became, if not insolvent, then at least stressed. And that had some negative spillover effects on the economy and the banking system in general.”

Barnes said that community institutions do not engage in such risky behaviors, adding that the health of community banks depends on the customer’s ability to make sound financial decisions.

“We do our business in a relationship sort of way,” Barnes said, according to Columbia Business Times. “We don’t do it in a mass advertising way: tantalize you, get in the door and turn on the charm. That’s not how community banks do business. Our ability to do relationship banking is inhibited by some degree by additional regulation because it doesn’t give us the flexibility to maybe create a product for you that fits you best. The added burden of regulation makes for more vanilla products.”

Dodd-Frank also established the CFPB, in addition to 1,100 pages of new regulation. The CFPB created the Community Bank Advisory Council to get input from community bankers.

While larger banks have the resources to deal with the new regulations, smaller banks may suffer because they lack the personnel and resources required to handle the incoming changes. Shelter Financial Bank made the decision to close its doors in response to Dodd-Frank and its new requirements.

“Dodd-Frank dramatically expanded the web of intricate requirements,” Shelter Financial President and CEO Ron Wheeling said, Columbia Business Times reports. “It was the final straw and a very large part of the decision to exit the banking business.”

Basel III rules established by the Basel Committee on Banking Supervision also have small banks concerned about the future. The rules would require banks to hold more capital to buffer against economic downturn.

“Basel III is not going to go away,” Howe said, according to Columbia Business Times. “As the discussion about it has progressed, there has been more and more talk of pushing this down to all banks, not just the big banks.”

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