So earlier this week I was in Las Vegas for the IMN/Structured Finance Industry Group’s ABS Vegas convention.
And I want this on the record – nothing happened. Nothing. Any security guard at the Bellagio, left shark imitator, or street magician with one leg who says otherwise is a dirty liar. Also, she didn’t have an Adam’s apple.
Also my Twitter was hacked.
Anyway, I sat down with Barney Frank to discuss his eponymous, co-authored bill, the Dodd-Frank Wall Street Reform Act.
I wore my sorta objective reporter cowboy hat and didn’t get in his way, even if some of the time he was giving his version of recent history I kept seeing a Venn diagram in my head.
One of the most salient questions came as a submission from a reader.
HW: Have regulators lost sight of the fact that Dodd-Frank was meant to end “too big to fail?”
Frank: I think they’ve done everything they could. There’s this stupid notion that a regulator is doing a favor by designating a financial institution as systemically important. We do recognize there are institutions that are institutionally too big to fail without doing something about their debts. But that’s different.
Well, as with gambling in general, timing is everything. Three days after our sit down comes this study of the effects of Dodd-Frank by the Harvard Kennedy School of Business that concludes that Dodd-Frank made “Too Big To Fail” even bigger.
Interestingly, we find that community banks emerged from the financial crisis with a market share 6 percent lower, but 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. Particularly troubling is community banks’ declining market share in several key lending markets, their decline in small business lending volume, and the disproportionate losses being realized by particularly small community banks.
Bottom line? Regulatory compliance costs have driven consolidation since 2010.
Worse, some of the biggest losers have been consumers, because the burden of that compliance cost is dragging on consumer lending.
Professor Scott Shane of Case Western Reserve University recently noted in Bloomberg Businessweek that a complex web of regulatory burdens is impeding the ability of banks to lend to small businesses. And a recent Harvard Business School working paper coauthored by former U.S. Small Business Administrator Karen Mills reported that regulatory burdens may be impeding community banks’ ability to participate in small business lending markets. In the late 2014 ICBA survey, 26 percent listed “regulatory burden” as a factor hindering consumer lending.
In addition, regulation – as opposed to market forces – appears to be an increasingly powerful force driving the growth of bank mergers. A May 2014 Wall Street Journal analysis of SNL Financial data found that community bank mergers increased 30 percent between May 2013 and May 2014. An October 2013 Bloomberg Businessweek story reported on banks engaging in “buying sprees” in response to regulatory pressures once they crossed the $10 billion threshold. A 2012 study found that community banks listed regulatory changes as the most common reason (38 percent) for M&A activity, and a 2013 study concluded that the top factor (35 percent) for information technology spending on infrastructure or compliance by community banks is “leveraging data more effectively for regulatory requirements.” In 2011, community banks reported to the FDIC that the problem was not any single regulation, but rather the web of regulations in their totality. The result? The Mercatus Center survey reported that 83 percent of small banks believe compliance costs have increased at least 5 percent since the passage of Dodd-Frank.
So what Dodd-Frank led to was more concentration and not less in lending, which of course hurt small businesses the hardest, who among institutions also suffered the most from compliance costs.
A 2014 Mercatus Center at George Mason University survey reported that over one-quarter of community banks (defined as those with less than $10 billion in assets) would hire new compliance or legal personnel in the next 12 months, and that another quarter were unsure about whether they would do so. It also found over one-third of banks had already hired new staff in order to meet new CFPB regulations. Another 2014 Minneapolis Fed study highlighted the perilous consequences of regulation-driven hiring at the smallest community banks (those with less than $50 million in assets), which, according to our calculations, in Q2 2014 accounted for 11 percent, or 682, of depository institutions (consolidating at the holding company level). At these institutions, the study found that hiring two additional personnel reduces median profitability by 45 basis points, resulting in one-third of these banks becoming unprofitable. As Fed Governor Tarullo has noted, “Any regulatory requirement is likely to be disproportionately costly for community banks, since the fixed costs associated with compliance must be spread over a smaller base of assets.”
And on helping consumers, Dodd-Frank is a bust.
All this consolidation and concentration has limited consumer choice to the detriment of small lenders and to the benefit of the original TBTFs. The Harvard study proves this beyond all shadow of a doubt.
As for eliminating TBTF, or ameliorating it by managing their debts as Frank told me – also a big goose egg.
In fact, it proved only the most basic free market truism – that when government and big, established businesses collude to write regulations supposedly for the benefit of consumers or society in general, what they write is regulations that benefit the big, established businesses and squeeze out smaller players.
Most regulation isn’t there as anything but a barrier to entry for competitors. That’s what big business and their lobbyists are paying for. The burden falls on the small guys, who get pushed out or bought up by the big fish.
Progressives like Frank like to look at real free market businesses and honest companies and say, “You didn’t build that.”
I guess in turn, the rest of us can look at the ever-expanding money laundry that runs from Wall Street to K Street and into the Capitol – the Dodd-Frankenstein monster that is Too Big To Fail – and say “Yeah, you built that.”
As is hopelessly, and invariably, the case, the cure sold by the snake oil salesmen in political office and the corner office was worse than the initial ailment.
We all will just need to live with that.