Costs are soaring for community banks struggling to comply with the Dodd-Frank Act and new regulations.
May 26, 2013 Leave a comment
Community banks are small business folks serving their fellow local small business community. Dodd-Frank is just another example of what BIG can and will do to you.
Big Government regulating Big banks has consequences and don’t say they’re unintended as the mainstream media will have you believe. We should make little Barney Frank and Chris Dodd go with the Feds next time they raid a small bank in a small tight knit community on a Friday night quittin’ time.
Make Dodd and Frank answer to small town bank employees faces when they lose their job. Make them stay until the Feds are done. In one case I know they made an IT Manager stay until midnight. She was told to stand outside her cubicle while they rifled through her files and computer. I wrote about this in The “Physical” Cliff, Writing Checks My Ass Can’t Cash.
Turns out regulating the BIG banks hurts community banks.
The State National Bank of Big Spring, Texas suspended its entire residential-mortgage division for fear of the newly “spawned” Consumer Financial Protection Bureau (CFPB) liability.
Twelve hundred rural US counties would have “severely limited banking access” without community bankers, who also serve other key sectors of our economy:
Community banks provide 48.1 percent of small business loans issued by US banks, 15.7 percent of residential mortgage lending, 43.8 percent of farmland lending, 42.8 percent of farm lending, and 34.7 percent of commercial real estate loans, and they held 20 percent of all retail deposits at US banks as of 2010.
In the early crucial stages, when a small business needs a loan, the collateral must be equal to or greater than the loan value. Most large banks just won’t bother. So where do small businesses turn for essential short and long term cash flow needs?
According to the National Federation Independent Business (NFIB), six percent of the owners reported that all their credit needs were not met, down 1 point and only 2 points above the record low. Thirty-one (31) percent of all owners reported borrowing on a regular basis. A net 7% reported loans “harder to get” compared to their last attempt (asked of regular borrowers only), up 3 points. The net percent of owners expecting credit conditions to ease in the coming months was a seasonally adjusted negative 8% (more owners expect that it will be “harder” to arrange financing than easier), 2 points worse than in March.
Here’s an excerpt from one recent article titled, Main Streets May Soon Be Without a Bank.
Government regulations have also forced many small community banks to close over the last three years. The Dodd-Frank Act was designed to regulate the banking and lending industries and decrease the likelihood of another financial catastrophe. Unfortunately, an unintended consequence is soaring costs for community banks struggling to comply with the new regulations. Many of those banks are located in smaller communities. The FDIC released a report last month that stated that no new community bank charters have been granted since 2011 due, in part, to Dodd-Frank.
According to an article, The Dodd-Frank Wall Street Reform and Consumer Protection Act: The Triumph of Crony Capitalism (Part 1) written by Jeff Harding, on August 11th, 2010 there are two questions you should consider while evaluating the Act’s impact and scope that help explain this boom-bust cycle:
- Why did the housing market become a bubble?
- Why would any lender lend money to a home buyer who (i) had a credit score of 500, (ii) made a down payment of 5% or less, and (iii) didn’t have to prove his or her ability to repay?
He answers these questions by saying:
- Only cheap money drives bubbles and there is only one entity that creates cheap money and that is the Federal Reserve—from 2000 to 2004 the Fed Funds rate went from 6.5% to 1.0% wildly distorting entrepreneurial behavior. This was the cause of this boom-bust cycle.
- No one would lend so carelessly unless they didn’t care. They didn’t care because someone else, in this case the government (Fannie, Freddie, and the FHA), would guarantee repayment.
Everything stems from these two factors yet there is nothing in the Act that prevents the Fed from starting a new cycle or that prevents Fannie or Freddie from again distorting the economics of the housing market.
Couple these alarming events with the fact there are 8.5M unbanked people eligible for Obamacare who will not be able to get it without a bank account…well we all know what rolls down hill.