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ABA testifies on Dodd-Frank impact on small banks

Testimony answers critics who think criticism is overblown

One of the results of the turnover of the House to the Republicans is a serious look at the impact of the Dodd-Frank Act on community banks. Hearings in the House Financial Services Committee have aired these issues. ABA Chairman-Elect Albert “Kell” Kelly, an Oklahoma community banker, testified for ABA on March 2.

Kelly struck three themes in his testimony:

• New rules substitute Washington bureaucratic judgment for that of local bankers.

“Increasingly,” said Kelly, “the government has inserted itself in the day-to-day business of banking.”
Dodd-Frank is only the latest wrinkle in a long line of measures passed since the crisis that has had this impact.

“The most egegious example is the price-controls for interchange fees being promulgated by the Federal Reserve under the Durbin Amendment,” said Kelly. “The result devastates retail bank profitability, stifles innovation, lowers productivity in our economy, and forces a number of individuals out of the protection of the banking system.” (ABA is seeking banker comments to Congress on this issue. Use the association’s letter writing site now.)

Many bankers also worry that the Durbin Amendment is the “camel’s nose in the tent.”

“It sets a dangerous precedent, suggesting that financial institutions may be subject to future, unknowable price controls on other financial products and services, undermining important free-market principles,” said Kelly.

[Older bankers and board members may remember the days of Regulation Q interest-rate controls on bank deposit products, and controls on product menus. Banks watched money market funds and other such uncontrolled products suck deposits out of banks by the billions in the 1970s. The impact was devastating.]

• New laws end up punishing community banks that had nothing to do with the crisis.

Kelly broadly attacked Dodd-Frank for harming community banks by imposing higher operating costs to comply with many new rules; placing limits on capital; restraining activities prompting community banks to exit business lines—some are already considering getting out of mortgage lending, for example; and adding more uncertainty and risk.

A particular concern is the new Consumer Financial Protection Bureau. While community banks don’t come under the bureau’s ordinary examination duties—though they can—the bureau took over many rule-making areas from the Federal Reserve, and its rule-writing authority does affect community banks.

Another concern deals with Dodd-Frank rules coming from the Securities and Exchange Commission that affect municipal advisors. Not intended to cover community banks by lawmakers, they may, anyway. The SEC has proposed a very broad defintion of “investment strategies,” Kelly noted, that would include typical community bank services provided to municipalities such as deposit accounts, cash management services, and loans.

“This means that community banks would have to register as municipal advisors and be subject to a whole new layer of regulation on bank products for no meaningful public purpose,” said Kelly.

• The consequences for consumers and the economy are severe.

“The Dodd-Frank Act will raise costs, reduce income, and limit potential growth, all of which drives capital away from banking, restricts access to credit for individuals and business, reduces financial resources that create new jobs, and retards growth in the economy,” said Kelly.

Kelly warned that the cumulative effect could be to drive banking industry consolidation.

“Lack of earnings potential, regulatory fatigue, lack of access to capital, limited resources to compete, inability to enhance shareholder value and return on investment, all push community banks to sell,” said Kelly. “I have spoken to many bankers throughout the country who describe themselves as simply miserable. Some have already sold their banks; others plan to do so once the economic environment improves.”

Dodd-Frank is a paradox, in the end.

“The Dodd-Frank Act was intended to stop the problem of too-big-to-fail,” said Kelly. “Yet now we have even bigger institutions. Ironically, the result may be that some banks will be too-small-to-survive the onslaught of the Dodd-Frank rules.”

Topics: ABA,

Steve Cocheo

Steve Cocheo’s career in business journalism has taken him to all 50 states and nearly every corner of banking in institutions of all sizes. He is executive editor of ABA Banking Journal, digital content manager of, and editor of ABA Bank Directors Briefing. He coordinates the popular Pass the Aspirin and First Person features and wrote the booklet series Focus On The Bank Director. He is the only journalist to have sat in on three federal banking exams, was a finalist for the Jesse H. Neal national business journalism awards, and a winner of multiple awards from the American Society of Business Publication Editors.

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