GAO: Small Banks, Credit Unions Hurt by Dodd-Frank

Published February 24, 2016

A new study released by an independent government watchdog agency says a financial regulatory bill intended to help consumers is actually reducing choices and services and lowering the quality of service provided by smaller banks and financial institutions.

As part of the package of regulations in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, commonly referred to as Dodd-Frank, the Government Accountability Office (GAO), the supreme auditing institution of the federal government, reviews Dodd-Frank on an annual basis, releasing its empirical analyses of the law’s regulatory burdens and their effects on taxpayers.

GAO found the costs of complying with Dodd-Frank have increased, including “increases in staff, training, and time allocation for regulatory compliance and updates to compliance systems.”

Banks are making fewer loans in some cases, the researchers also found.

‘Smothering Impact’

Mark Thornton, a senior fellow with the Mises Institute, says Dodd-Frank has all but ended the days of the friendly, small-town neighborhood bank.

“Dodd-Frank has had a smothering impact on Main Street banking,” Thornton said. “You have to fill out large stacks of red-tape paperwork for a simple loan, and the banker’s liability does not end until the loan is paid off. It must be difficult for an independent bank without a full-time lawyer to compete under these conditions.”

Thornton says Dodd-Frank benefits large, powerful banking companies, instead of achieving its stated goal of protecting financial institutions of all sizes against rough economic times.

“The global goal of Dodd-Frank is to provide the illusion of regulation, stability, and confidence,” said Thornton. “Did it solve the ‘too big to fail’ problem? No. Those ‘too big to fail’ banks are even bigger and more powerful. It also provides politicians, regulators, and banksters the opportunity to manipulate the bank system for political or economic gain.”

Thornton says Dodd-Frank is about suppressing the finance and banking industries, not ensuring economic stability.

“They do not want an honest, stable system,” Thornton said. “What they are working towards is an oligopoly or oligarchy of banking, where you have a small number of very large government-privileged banks, where competition from small banks is effectively suppressed by bank regulations.”

Small Banking Gets Smaller

John Berlau, a senior fellow at the Competitive Enterprise Institute, says consumers are objectively worse off because of Dodd-Frank.

“Small banks and credit unions are much harder hit by Dodd-Frank,” Berlau said. “Since Dodd-Frank passed, the number of banks with assets of less than $1 billion has declined by 20 percent, and many of those that have managed to stay in business have stopped making new mortgages or issuing money transfer remittances because of the stringent new rules.”

Market principles would be a better solution to the problems Dodd-Frank supposedly attempts to solve, Berlau says.

“The law didn’t even touch the crisis’ major culprits: the government-sponsored enterprises of Fannie Mae and Freddie Mac,” Berlau said. “The way to achieve these shared goals of stopping bailouts and stopping firms from being ‘too big to fail’ would be to repeal 95 percent of Dodd-Frank, phase out Fannie Mae and Freddie Mac, and make a firm rule that, except for existing deposit insurance on bank accounts, no firm will ever be bailed out. Once firms see ‘no bailouts’ as a rule, most will take their own measures to curb unnecessary risk, knowing there is no safety net.”

Andy Torbett ([email protected]) writes from Atkinson, Maine.