Dodd Frank Regulations Threaten the Existence of Community Banks

[Corey Dutton]

With an increasing number of mergers in the banking industry it’s no doubt that increased regulation under Dodd Frank has a role in it. Donald J. Mullineaux explores this topic more in a recent article from American Banker where he calls these new regulations an industry shock, “an unanticipated development or event that significantly alters the cost and or revenue structure in a particular industry.”

The increasing fixed costs that banks have seen in recent years in order to become compliant with new regulations under Dodd Frank have certainly spurred M & A activity. For smaller banks, as compared with the big banks, spreading increasing fix costs over a small asset base can be a challenge. Mr. Mullineaux believes that this may be the biggest reason for the increasing number of mergers in the banking industry. But with the disappearance of smaller community banks, as they are rapidly acquired by larger institutions, many industry experts are concerned that credit in local economies will disappear. In fact, Daniel Tarullo of the Federal Reserve is concerned about the economic effect these M & As in the banking industry will have on small business, “Community banks are of special significance to local economies….the disappearance of community banks could augur a permanent falloff in this kind of credit.”

In line with what many critics feared would result from increased financial regulation under Dodd Frank, will the availability of credit in local economies in the U.S. disappear altogether? With such a large number of mergers happening in the banking industry, it could happen faster than we think.

(Source: American Banker: http://www.americanbanker.com/bankthink/no-denying-dodd-franks-role-in-bank-m-1073771-1.html )

Posted by Corey Curwick Dutton, Hard Money Lender