As small banks continue to crumble under current financial regulatory policy, one congressman offered a proposal that little attention was paid to earlier this October. On The Breakfast Club radio show, Florida Congressman Byron Donalds revealed that “we have less community banking in the United States than in 2009,” a trend that has lessened consumer choice and freedom. The culprit? The Dodd-Frank Act and its passage in 2010, which restricted smaller banks’ ability to serve local businesses and borrowers.
Donalds’s message identifies the source of the problem, and President-elect Donald Trump’s new administration should listen. If community banking is to thrive again in America, the Dodd-Frank Act must be rolled back to make way for personalization, access to capital, and improved market competitiveness.
Over time, the Dodd-Frank Act proved that government regulators lack the risk management skills necessary to support the private sector. The act has made it more difficult for small banks to operate profitably, leading to fewer new bank charters since 2011. According to the Institute for Local Self-Reliance, “megabanks — giant banks with more than $100 billion in assets (in 2010 dollars) — control” fifty-nine percent of “all banking assets” today. This dramatically increased from the forty-one percent they controlled in 2005 pre-Dodd.
Because of their locality, community banks take a personalized approach to customer service, adapting to the specific needs of their clients. Yet, when these smaller players are crowded or phased out of the market, customers lose the tailored service and its benefits—including taking risks on new, innovative businesses. Concentrating power in risk-averse big banks limits the diversity of financial products and services available to hungry entrepreneurs. Consequently, the banking industry becomes less dynamic.
There is strict compliance with Dodd-instated regulations, such as with mortgages, that have undercut the sector further. Fred Green, the CEO of the South Carolina Banking Association, testified to Congress in 2012 that “[e]very dollar spent on regulatory compliance means as many as ten fewer dollars available for creditworthy borrowers. Less credit, in turn, means businesses can’t grow and create new jobs.” A study by the Hoover Institution confirmed Green’s warnings, showing how increasing the federal funds rate induces banks to tighten credit loans on small businesses instead of larger entities.
These demands drain precious resources that could be used for lending, the core mission of community banks. The dried-up loans have only worsened since last year, and while Dodd-Frank was meant to stop the predatory practices of big banks, it stifled the innovation of neighborhoods across America.
By short-changing small banks, the process of weakening Dodd-Frank could be bipartisan, and a second Trump administration should take advantage of the collective disapproval. President Trump made commendable progress during his first term by signing a 2018 bill into law that curbed Dodd-Frank’s overreach. Both Democrats and Republicans championed the bill when local economies boomed under less red tape.
Now, with Democrats like Representative Ritchie Torres describing Dodd-Frank regulations as “an insidious threat to civil liberties in America,” the need for change is widespread. But most importantly, it’s here.
Congress could use the budget reconciliation process to change Dodd-Frank with only a simple majority in the Senate. Meanwhile, President Trump can issue executive orders to influence certain aspects of the law’s implementation. With Trump’s focus on minimizing government size and scope, the newly commissioned Department of Government Efficiency could repeal Dodd-Frank regulations through rulemaking. Co-Chair Elon Musk has expressed willingness to help Congress abolish the Consumer Financial Protection Bureau, a staple of Dodd-Frank, entirely if he assumes the position.
Rescinding Dodd-Frank would be a blessing to small banks. It would lower compliance costs for banks, which would increase lending capacity. In turn, community banks would have more freedom to determine their operations, which gives them the potential to expand. It would promote deregulation and economic opportunity for all while fixing lousy policy.
Congressman Donalds’s remarks are one of the many rallying cries for government reform with Dodd-Frank. Community banks can feel and see that Dodd-Frank has overstayed its welcome, and it’s time to challenge its authority. Regulation is not the answer, but economic liberty is the solution.
