Fed backs small bank regulation relief as Dodd-Frank weighs

Fed backs small bank regulation

The Federal Reserve will push ahead with regulatory relief for small banks, as a report reveals that America’s community banks are being hit hardest by Dodd-Frank legislation.

In prepared remarks at an event in Dallas, Fed governor Jerome Powell stressed the bank is looking to ease restrictions on smaller institutions.

“Well-conceived regulations help to ensure the safety and soundness of our banking system as well as the fair treatment of consumers,” he said. “But unnecessary, outdated, or unduly burdensome regulations can exhaust the resources of insured depository institutions and reduce the important services that those institutions provide to households and businesses.”

It comes amid growing concerns that regulations implemented in the wake of the financial crisis are having an unduly harsh effect on small banks.

A new study highlighted that community banks had lost market share at twice the rate they did prior to enactment of Dodd-Frank. Banks with less than $10 billion in assets lost around six per cent of their share of US banking assets between 2006 and 2010. Since then the figure has leapt to around 12 per cent.

A key issue flagged by the authors, Marshall Lux and Robert Greene of Harvard’s Mossavar-Rahmani Center for Business and Government, was that regulations are not linked to the size of the institution, meaning there are economies of scale in compliance.

In effect, this means the burden of regulatory compliance falls disproportionately on community banks.

Fed governor Daniel Tarullo has said: “Any regulatory requirement is likely to be disproportionately costly for community banks, since the fixed costs associated with compliance must be spread over a smaller base of assets.”

The Lux-Greene report also showed that the five biggest American institutions’ share of banking assets rose by 18.4 per cent during this period at the expense of other large banks, some of which failed in the crisis.

“Interestingly, community banks’ vitality has been challenged more in the years after Dodd-Frank than in the years during the crisis,” the authors say.

“The rapid rate of consolidation away from community banks that has occurred since Dodd-Frank’s passage is striking given that this regulatory overhaul was billed as an effort to end ‘too-big-to-fail’.”