The Three Myths About Dodd-Frank and Community Banks

This post is based off remarks given at a House of Representatives briefing on the 2007-08 Financial Crisis and the current state of financial reform.

There is ample media coverage and anecdotal claims from the banking industry that Dodd-Frank is bad for community banks. It’s politically challenging to counter this narrative because nearly every county in the US has a community bank, and, in turn, every member of Congress has at least one community bank as a constituent. But, if you look at the best available data on the state of community banking, it becomes difficult to buy the story that Dodd-Frank hurts community banks. The data doesn’t support the claim.

To begin, let’s set the record straight on the facts.

Community bank profitability is up. The FDIC’s most recent report showed community banks’ net income rose 10.4 percent from last year. Its 2016 quarterly profile on FDIC-insured banks found community bank revenue and loan growth outpaced the industry at large. Since Dodd-Frank was passed in 2010, aggregate profit of FDIC-insured banks, including community banks, has followed an upward trajectory.

Bank lending is up. The same FDIC report found the annual loan growth rate at community banks outpaces that of non-community banks. Loan balances for community banks rose by 7.7 percent over the past 12 months. This is more than twice the loan growth in large banks, which was 3.3 percent. Over 75 percent of community banks increased their loan balances from a year ago.

Despite this evidence, a concerted narrative pushed by the banking industry and its lobbyists has successfully convinced policymakers that regulatory relief is needed for community banks. This narrative can be boiled down to three unfounded claims: 1) Dodd-Frank is an unfair one-sized-fits-all reform that treats large and small banks the same; 2) this has prohibitively increased compliance costs for community banks, making them unprofitable and unable to lend; and 3) this has resulted in…

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