NEW YORK (MainStreet) — A newly released Harvard study indicates that the Dodd-Frank Wall Street Reform and Consumer Protection Act has given Wall Street an advantage over Main Street - the opposite of what was intended.

Two researchers at the Mossavar-Rahmani Center for Business and Government of the John F. Kennedy School of Government at Harvard University have just published their findings in a report called "The State and Fate of Community Banking" that concludes Dodd-Frank has helped to speed up the decline of America’s community banks.

The study’s authors, Marshall Lux and Robert Greene, found that even though the community banks’ share of financial assets was already decreasing during the past twenty years,  “since the second quarter of 2010—around the time of the passage of the Dodd-Frank Act—their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.”

The researchers also claim that some of the worst provisions for community banks were those directed specifically at Wall Street. One example is the Volcker Rule, a section of the Dodd-Frank act proposed by former Fed Chairman Paul Volcker that prohibits banks from making certain types of investments  The study says this regulation has caused some community banks to sell off assets.

Jim Purcell, president of the State National Bank of Big Spring (Texas), has experienced first-hand the problems community banks are having. His bank is co-plaintiff in a constitutional challenge to Dodd-Frank.

“Dodd-Frank systematically favors big banks over community banks, and that bias poses a serious threat to the banking relationships that community banks, Main Street businesses and other folks have fostered for a century,”  Purcell said.

He was not very complimentary of the Consumer Financial Protection Bureau (CFPB).

“Dodd-Frank imposes immense regulatory costs upon community banks, costs that are exacerbated by the CFPB’s persistently, inherently regulatory uncertainty," Purcell said. "As the CFPB’s own web site shows, its rulemakings are the subject of constant, significant revision -- and that’s when the CFPB bothers with express rulemakings at all, instead of regulating informally through case-by-case 'guidance' and enforcement proceedings.” 

The regulations imposed by Dodd-Frank most stifle the little guy. Purcell elaborated that knowing the specifics about the rules as well as how and when to apply them takes significant training, which costs time and money. Ultimately, his bank incurs tens of thousands of dollars in new compliance costs, as a result of the CFPB’s “new, unaccountable, and un-transparent regulatory regime.” These have an adverse effect on the types of lending activities and other financial services in which community banks like his engage.

“So many requests that our bank and other community banks receive from customers simply don’t fit with the big banks’ impersonal, automatic approaches," he said. "Community banks like ours know our customers -- we see them every day. And we want our customers to succeed -- they are our community. The big Wall Street banks simply don’t have that kind of relationship with American communities."

A longtime Dodd-Frank critic is John Berlau, a senior fellow and an economist with the Competitive Enterprise Institute. He predicted that Dodd-Frank would have a disproportionately deleterious effect on smaller banks. The day President Obama signed the bill, July 15, 2010, he wrote in an article that while aiming to crack down on Wall Street’s excesses the harshest impact will be on average businesses that did not cause the crisis.

He feels vindicated after receiving much scorn by many in the media and many politicians who claimed that it will only hurt Wall Street. These same people are starting to see the light.

“Many Democrats and Republicans recognize that Dodd-Frank has had unforeseen negative consequences for community banks and credit unions," he said. "Several bipartisan bills to provide relief to smaller financial institutions have passed the House in the last couple years.” 

Berlau lamented the fact that former Senate Majority Leader Harry Reid (D-Nev.) never even brought the bills to the floor for a vote.

"Now this will change, and President Obama will have the opportunity to show that he meant what he has said about bipartisanship by signing this relief into law,” Berlau said.

Berlau highlighted the one politician adamant about keeping Dodd-Frank the way it is.

“Elizabeth Warren [D-Mass.] seems to be the only person in the country who thinks Dodd-Frank isn't harming community banks,” he added.

The report’s assessment of Federal Deposit Insurance Corporation data indicated that community banks service a disproportionately large proportion of key segments of the commercial bank lending market – e.g. agricultural, residential mortgage, and small business loans. Particularly troubling to them was the community banks’ declining market share in several key lending markets such as the small business market. The study cautions that community banks play an important role in these areas. Even though community banks weathered the financial crisis, since Dodd-Frank Act market share lost is accelerating.

Lux and Greene from the Harvard study suggest that while consolidation in and of itself is not bad, a critical component of the banking sector “may be withering for the wrong reasons.” One way to correct this is to revamp federal regulators’ cost- benefit analysis and enable regulators to achieve intended goals more efficiently and at lower costs to community banks.

Finally, they say Congress should act to improve existing regulatory processes by and “to establish a bipartisan commission aimed at streamlining existing financial regulations."

--Written for MainStreet by Michael P. Tremoglie

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