Monday, April 13, 2015

Facts versus Beliefs: Community Banks and Dodd Frank

Community banks have developed an endearing tag-line to flight for exemptions from the deeply flawed and unpopular Dodd Frank Act (DFA). It was passed in 2010 to correct perceived, primarily Too-Big-To-Fail, bank abuses. The regulated never like to be regulated. So the community banking lobbyists have sized on a statistical fact to fight DFA. Since 2010 the number of community banks with assets less than $1B has fallen from just over 2600 to less than 1900. Ergo, the DFA (AKA The Great Satan) is responsible for the decline. Therefore, community banks need an exemption from DFA to prevent their eminent extinction. Everyone who has seen plight of Bailey Building and Loan in Its a Wonderful Life will rush to the defense of such small under dogs.

They almost had me convinced until I looked at the numbers. Small community banks-especially those below $100 million in assets have been in a long-term structural decline since the 1980s. Something other than DFA must be causing the decline. Just so happens that something else is economies of scale. Banks below $100 million in assets simply lack the scale to compete both before and after DFA. Thus, they are forced to exit usually by sale to other larger community banks. In fact, small bank M&A continues to be a bright spot in the industry. Industry consolidation waves are usually driven by underlying structural changes-not evil forces.

Community banking is adjusting to changing industry cost structures. This is a healthy development similar to what has happened in other consolidating industries. Undoubtedly, there will be winners and losers with the losers screaming the loudest. Nonetheless, as former Senator Moynihan noted-you are entitled to your beliefs-but not to your own facts. So stop the screaming and get your facts right.



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