How Are Small Banks Faring Under Dodd-Frank?

How are Small Banks Faring Under Dodd-Frank?

Hester PeirceMercatus Senior Research Fellow

Ian RobinsonMercatus MA Fellow

Thomas StratmannMercatus Scholar

The Dodd-Frank Act

• Dodd-Frank was the response to the financial

crisis and, in the minds of some, a way to punish

big banks

• Small banks were not a target of Dodd-Frank

• Congress exempted small banks from some of

Dodd-Frank’s provisions

Why Small Banks Matter

• Small banks serve communities that large banks

don’t serve

• Small banks are an important source of small

business loans

• Small banks lend to people who don’t fit within

large banks’ plain vanilla lending models

Bank Concentration

0

20

40

60

27.5%

46.6%

30.1%

18.6%

Source: Statistics on Depository Institutions, Federal Deposit Insurance Corporation.Data note: Banks are ranked by asset size. Small banks are defined as U.S. banks with $10 billion or less in assets. For purposes of this chart, banks were aggregated under their bank holding companies. Available data did not permit thrifts to be aggregated under their holding companies. Produced by Hester Peirce, Robert Greene & Rizqi Rachmat, Mercatus Center at George Mason University

Share of Total US Banking Assets Held by 5 Largest Banks vs. Small Banks

%

5 largest banks

small banks

%

%

%

Why We Surveyed Small Banks

• Only ½ of rules are done, but anecdotes suggest

small banks are feeling the weight of Dodd-Frank

• Some empirical work has been done, but we saw

the need for a large-scale survey of small banks

• We included banks with $10 billion or less in assets

• We collected online responses to 96 questions from

approximately 200 banks in July-September 2013

What We Found

• Compliance costs are going up

• Small banks are very concerned about the mortgage

rules and the CFPB

• Banks are considering cuts to products and services

and consolidation

• Banks expect consumers will not benefit

Results

Results

Less than $10 million

$10 million to $100 million

$100 million to $1 billion

$1 billion to $10 billion

0%

20%

40%

60%

80%

0.9%

22.7%

65.0%

11.4%

0.4%

29.6%

61.3%

8.8%

Figure 2. Distribution of Survey Sample vs. Distribution of Small Bank Population

% of Sample % of Population

Results

84.6%

0.9%

1.4%2.3%

10.9%

Figure 5. Which of the following best describes your bank?

Local

National

Statewide

Interstate-Regional

Intrastate-Regional

Sample Size N = 222 with 221 valid responses

Results

Rural (population less than 50,000)

Small metropolitan area (population

greater than 50,000 and less than

500,000)

Large metropolitan area (population

greater than 500,000)

0%

10%

20%

30%

40%

50%

60%

70%Figure 10. Market Type(s) Served

Geographic Area

Perc

en

tag

e o

f R

esp

on

den

ts

Sample Size N = 222

Results

Low Income Moderate Income

Middle Income Upper Income0%

10%

20%

30%

40%

50%

60%

70%

34.7%

64.9%

56.3%

14.9%

Figure 11. Income Market(s) Served

Martket Income Type

Perc

en

tag

e o

f R

esp

on

den

ts

Sample Size N = 222

Results

82.9%

8.0%

3.2%0.5% 5.3%

Figure 19. Change in Annual Compliance Costs since Dodd-Frank

Increased by more than 5%

Increased by less than 5%

No change

Decreased by less than 5%

Decreased by more than 5%

Sample size N = 190 with 187 valid responses

Results

0 1 2 3 4 5 6 7 8 9 10 or more

0%

10%

20%

30%

40%

50%

60%

70%

Figure 20. Histogram of Compliance/Legal Personnel

Before Dodd-Frank Current

Number of Compliance/Legal Personnel

Pe

rce

nta

ge

of

Re

sp

on

de

nts

Sample Size N = 190

Results

65.6%

0.5%

2.1%

15.3%

16.4%

Figure 22. Dodd-Frank Compared to the Bank Secrecy Act (BSA)

Substantially more burdensome than the BSA

Substantially less burdensome than the BSA

Slightly less burdensome than the BSA

Slightly more burdensome than the BSA

As burdensome as the BSA


Results

Yes71.0%

No29.0%

Figure 31. Business Activities Affected by CFPB?


Results

1 2 3 4 50%

20%

40%

60%

80%

Figure 33. Histogram of Personnel Added Due to CFPB

Number of Personnel Added

Pe

rce

nta

ge

of

Re

sp

on

de

nts

Sample Size N = 63

Results

Residential MortgagesHome Equity Lines of Credit

Overdraft ProtectionMortgage Servicing

Remittance TransfersCredit Cards

Construction and Development LendingInsurance

Debit CardsSmall Business Lending (SBA)

Small Business Lending (non-SBA)Agricultural Lending

Commercial Real Estate LendingOther Commercial Lending

Securities and Investment ProductsDerivatives

0% 3% 6% 9% 12%

Figure 14. Impact of Dodd-Frank on Products/Services Offered

Anticipate Discontinuing as a Result of the Dodd-Frank ActDiscontinued as a Result of the Dodd-Frank Act

Percentage of RespondentsSample Size N = 222

Results

In response to specific regulatory requirements

In anticipation of future regulatory changes

For business reasons

In response to demand changes in the secondary market

In response to bank examiner requests

Other

0% 10% 20% 30% 40% 50% 60%

Figure 35. Reasons for Alterations to Mortgage Offer-ings

Percentage of Respondents

Sample Size N = 172

Results

Consumer Financial Protection Bureau

Definition of “qualified mortgage”

Definition of “qualified residential mortgage”

Low-interest rate environment

Pressure from bank examiners

Changed underwriting requirements by Fannie Mae and/or Freddie Mac

Basel III

0% 10% 20% 30% 40% 50% 60%

Figure 36. Effects on Mortgage Offerings

Significant Positive Impact Slight Positive ImpactSlight Negative Impact Significant Negative Impact

Percentage of RespondentsSample Size

N = 172

Results

Yes34.8%

Not Applicable2.4%

No30.5%

Unsure32.3%

Figure 37. Does your bank anticipate that it will make any loans that do not meet the definition of a "qualified

mortgage"?


Results

Changes in mortgage regulation


Debit card interchange fees

New capital requirements

Systemic risk oversight

Incentive-based compensation

FDIC insurance coverage

Municipal advisor regulation

Elimination of the Office of Thrift Supervision

Volcker Rule

Derivatives regulation

0% 10% 20% 30% 40% 50% 60% 70%

Figure 41. Impact of Policy on Bank Earnings

Significant negative impactSlight negative impactSlight positive impactSignificant positive impact Sample size N = 172

Percentage of respondents

Results

Yes26.3% No

46.3%

Unsure27.5%

Figure 42. Anticipate Engagement in M&A Activity in the Next Five Years


Results

Securities and Exchange Commission

State insurance regulators


Office of the Comptroller of the Currency

Federal Reserve

Federal Deposit Insurance Corporation

State bank regulators

None of the above

0% 10% 20% 30% 40% 50% 60% 70%

0.5%

1.1%

2.1%

8.4%

11.1%

16.3%

22.6%

65.8%

Figure 16. Regulator Contact Regarding Feasibility of Dodd-Frank


Policy Implications

• Regulators need to listen to small banks

• Utilize economic analysis and analysis under the

Regulatory Flexibility Act and SBREFA to help identify

the consequences and quantify the impact before a

regulations are adopted

• Eliminate unnecessary regulatory burdens

• Provide longer implementation periods

Questions & Comments

Hester Peirce

[email protected]

Ian Robinson

[email protected]

Thomas Stratmann

[email protected]

Additional Charts

Additional Charts

0

4000

8000

1200011,058

6,279

Figure 1. Number of Banks with $10 Billion or Less in Assets

(Quarterly Data, 1993–2013)

Source: Statistics on Depository Institutions, Federal Deposit Insurance Corporation.Data notes: Bank holding companies were used to group organizations. Thirft holding companies were not used to group organizations, because complete data on thrift holding companies was not available.

Additional Charts

44.3%

0.5%0.5%0.5%

23.1%

31.2%

Figure 3. Bank Type

State-chartered and not a Federal Reserve member

Federal Savings Bank

Mutual Federal Savings Bank

Other

Nationally chartered

State-chartered and a Federal Reserve member

Sample Size N = 222 with 220 valid re-sponses

Additional Charts

85.7%

14.3%

Figure 4. Charter Type


Bank

Thrift(including sav-ings association, savings bank, savings and loan association, or mutual)

Additional Charts

57.1%

13.2%

29.7%

Figure 6. Changes in the Number of Branches Since 2008

Stayed the same

Decreased

Increased


Additional Charts

41.6%

55.2%

3.2%

Figure 7. Organizational Structure

Stand-alone

Subsidiary of a fi-nancial holding com-pany

Other


Additional Charts

Other

Traded on an exchange

Mutual

C Corp

S Corp

Family-owned

Closely held

0% 5% 10% 15% 20% 25% 30% 35% 40%

Figure 8. Ownership Description


Additional ChartsFigure 9. Geographic Distribution of Responding Banks

Additional Charts

None/NA94.0%

Other Response6.0%

Figure 12. Products and Services Added in Response to Dodd-Frank


Additional Charts

Personal Checking

Certificates of Deposit

Debit Cards

Business Savings

Commercial and Industrial Lending

Other Commercial Lending

Agricultural Lending

Small Business Lending (SBA)

Mortgage Servicing

Securities and Investment Products

Insurance

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Figure 13. Products and Services Currently Offered


Additional Charts

Met with an elected official to discuss regula-

tory policy issues

Discussed regula-tory issues with regulators (not

including routine contacts with ex-

aminers)

Submitted public comments in

connection with proposed regula-tions, including through a repre-sentative orga-nization or out-side law firm

Held a member-ship in a repre-sentative orga-nization that en-gages in advo-cacy on regula-

tory issues

Engaged in other public advocacy such as letters to the editor, op-ed pieces, open let-ters, or blog arti-

cles

None of the above

0%

20%

40%

60%

80%

100%

Figure 15. Engagement in Advocacy EffortsBefore the passage of the Dodd-Frank Act in July 2010

After the passage of the Dodd-Frank Act in July 2010

Pe

rce

nta

ge

of

Re

sp

on

den

ts

Sample Size N = 190

Additional Charts

0%

25%

50%

75%

100% 93.7%

38.4%

23.2% 22.6%

9.5%2.1%

Figure 17. Compliance Responsibility

Perc

en

tag

e o

f R

esp

on

den

ts

Sample Size N = 190

Additional Charts

Yes51.1%

No27.7%

Unsure21.3%

Figure 18. Anticipated Engagement with Outside Consultants for Dodd-Frank


Additional Charts

Yes27.4%

No44.6%

Unsure28.0%

Figure 21. Hiring Additional Compliance Personnel in Next 12 Months


Additional Charts

Business reasons

Anticipation of Basel III changes

Recommendation of bank regulators

Specific regulatory requirements

Other

Merger/acquisition

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Figure 23. Reasons for Changes in Tier 1 Capital

Anticipated changes Changes since Dodd-Frank

Percentage of respondentsSample size N = 190

Additional Charts

None/NA82.8%

Other re-

sponse17.2%

Figure 24. Effect of Trust-Preferred Securities Phaseout


Additional Charts

50%+ increase40–49% increase30–39% increase20–29% increase10–19% increase

1–9% increaseNo change

1–9% decrease10–19% decrease20–29% decrease30–39% decrease40–49% decrease

50%+ decrease

0% 5% 10% 15% 20% 25% 30%

Figure 25. FDIC Premium Changes

Percentage of respondents

Ch

an

ge

in

FD

IC p

rem

ium

Sample size N = 190

Additional Charts

Yes48.3%

No30.1%

Unsure18.8%

Not applicable2.8%

Figure 26. Has the Durbin Amendment Affected Your Bank?

Sample size N = 190 with 176 valid re-sponses

Additional Charts

Yes4.0%

No67.2%

Unsure12.6%

Not applicable16.1%

Figure 27. Have the Municipal Advisor Rules Changed the Way You Interact with Municipalities?


Additional Charts

Federal Reserve16.0%

Office of the Comp-troller of the Cur-

rency25.1%

Federal Deposit In-surance Corporation

58.9%

Figure 28. Primary Federal Regulator


Additional Charts

Somewhat30.8%

Not at all1.2%

Very well10.5%

Unsure15.1%

Very little19.2%

Well23.3%

Figure 29. Coordination among Regulators


Additional Charts

No91.3%

Yes0.6%

Unsure8.1%

Figure 30. Activities Modified in Anticipation of the Volcker Rule


Additional Charts

Yes37.3%

No62.7%

Figure 32. Compliance/Legal Staff Added Due to CFPB


Additional Charts

Yes63.6%

No14.8%

Unsure21.6%

Figure 34. Anticipate Changes to the Nature, Mix, and Volume of Mortgage Products in Response to Regula-

tory Changes


Additional Charts

39.8%

8.7%11.2%

16.1%

24.2%

Figure 38. Changes in Customer Fees since Dodd-Frank

Remained the sameDecreased by less than 5%Increased by less than 5%Increased by more than 5%


Credit cards

Insurance

Certificates of deposit

Small business lending (SBA)

Commercial and industrial lending

Agricultural lending

Other commercial lending

Business checking

Home equity lines of credit

Construction and development lending

Personal checking

0% 5% 10% 15% 20% 25%

Figure 39. Effects of Dodd-Frank on Fees of Product/Service

Increased by more than 5%

Increased by less than 5%

Decreased by less than 5%

Decreased by more than 5%

Percentage of respondentsSample size N = 172 Figures representing "no impact" have been omitted

Additional Charts

8.1%

28.6%

14.3%

26.7%

22.4%

Figure 40. Change in Return on Equity since July 2010

Increased signif-icantlyIncreased slightlyNo changeDecreased slightlyDecreased signif-icantly


Additional Charts

0%

2%

4%

6%

8%

10%Figure 43. Potential Future Strategies

Pe

rce

nta

ge

of

Re

sp

on

den

ts

Sample size N = 172

Additional Charts

Not concerned at all3.7%

Slightly concerned18.0%

Concerned37.9%

Extremely concerned

40.4%

Figure 44. Concern about the Current Interest Rate En-vironment


Additional Charts

Concerned36.6%

Not concerned at all4.3%

Slightly concerned

23.6%

Extremely concerned

35.4%

Figure 45. Concern about Future Interest Rate Risk


Additional Charts

Yes49.4%

No50.6%

Figure 46. Alterations to Credit-Analysis Practices in Response to Dodd-Frank


Additional Charts

Altered the na-ture of the se-curities that

your bank pur-chases

Contracted with outside firms to conduct credit

analysis

Hired additional employees to conduct credit

analysis

Other0%

5%

10%

15%

20%

25%

Figure 47. Alterations to Credit Analysis Practices in Response to Dodd-Frank

Pe

rce

nta

ge

of

Re

sp

on

den

ts

Sample size N = 162

How Are Small Banks Faring Under Dodd-Frank?

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