Small U.S. lenders feel brunt of Dodd-Frank
Regulatory burden puts crimp on banks
• If some American banks are too big to fail, others have begun to feel they’re too small to succeed.
Just ask Joey Root, the president of First Liberty Bank in Oklahoma City with US$ 310 million in assets. Root says small banks like his are being squeezed hard these days, even as the likes of JPMorgan Chase & Co. prosper. Small borrowers are losing out to big ones, too.
Community lenders like Root didn’t have much to do with the buildup of risks that triggered the 2008 crisis. And when the rules were tightened in response, as they had to be, there’s a case to be made that they took a disproportionate hit.
That argument makes a convenient stalking horse for the largest banks, now the fight over regulation is back on. So it’s viewed with great suspicion by Democrats. President Donald Trump announced his intention to do a “big number” on the Dodd- Frank Act, the most sweeping financial reform since the Great Depression, before an audience of small-business leaders.
They’re the kind of borr owers who have been shunted aside, t he data show. Main Street-style business loans of US$1 million or less are growing now, by five per cent in the 12 months t hrough September. But that’s after several years of contraction, and the recovery came later, and slower, than the overall market. So proportionally they’ve fallen: to 20 per cent of total business credit from 35 per cent in 2004.
First Liberty lends to nail salons and plant nurseries. Its collateral might be a suite of marble sinks, or a yard full of seedlings. “You can’t factor that into a machine that is going to give you the correct score, and tell you if that is the correct loan,” Root said.
Smaller banks say they’re st r uggli ng with a dded labour costs after adding compliance staff, while big banks spend millions to automate those decisions.
Some of the problems for small banks and borrowers predate Dodd- Frank, and others have nothing to do with regulation: Economic growth has been mediocre, and many households and small businesses are cautious about borrowing after the shock of 2008. Still, even the regulators in charge of the post-crisis tightening acknowledge there’s an issue that should be addressed.
“We should be heavily focused” on reducing the regulatory burden on community banks, Federal Reserve chair Janet Yellen told the House of Representatives Feb. 15.
The Fed r ecently exempted some regional banks from parts of the stress tests it conducts to make sure fi- nancial institutions have enough capital to weather a downturn.
Another problem f or smaller borrowers: There are almost no new banks. Such lenders are key sources of credit for startups, or neglected borrowers, because they’re startups themselves — on the lookout for clients that moreestablished lenders might have disregarded.
A survey by regional Fed banks in 2015 found credit availability was the secondbiggest challenge for startup businesses.
In 2005, 167 new charters were granted. The total number of new banks operational since 2011 is four. One of those — Bank of Birdin-Hand of Lancaster County, Pa., — specializes in lending to the Amish.
When the Fed was founded in 1913, making credit broadly available — to farmers, small manufacturers and households through economic shocks and seasonal shifts — was a key goal.
Since 2008, the focus has been on resilience: ensuring the financial system doesn’t boom and bust. Because mortgage lending was central to the crisis, it’s no surprise that it’s been subject to tighter regulation.
Still, there’s an argument that banks and regulators have overshot in the quest for safety. Analysts at the Urban Institute in Washington found that 6.3 million additional mortgages would have been issued between 2009 and 2015 “if lending standards had been more reasonable.”
About 58 per cent of mortgage lending initiated in the last quarter of 2016 went to people with credit scores of 760 or above, according to the New York Fed. In the same period of 2003, the toprated group was getting only a 28-per-cent share.
Dan Kemp, a senior vicepresident at Security State Bank & Trust in Fredericksburg, Tex., says the cost to his bank of making a mortgage has about doubled from a decade ago. He’s concerned that higher costs are causing a consolidation among small banks and limiting credit as bigger lenders shy away from anything but plain vanilla loans.
“There is too- big- to- fail and too- small- to- survive,” Kemp said.
THERE IS TOO-BIG-TO-FAIL AND TOO-SMALL-TO-SURVIVE.