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Dodd-Frank’s Impact On Small Banks

[bctt tweet=”Have small banks truly been hit, financially and otherwise, by the Dodd-Frank financial reforms? Depends on who you ask.”]

Have small banks truly been hit, financially and otherwise, by the Dodd-Frank financial reforms? Depends on who you ask.

Though small banks, especially community lenders, may have misgivings on the legislation, which was passed five years ago, and complain that they have fewer opportunities to lend to mainstream borrowers here in the United States, The Wall Street Journal reports that the data may suggest otherwise.

To recap the sweeping movements by Dodd-Frank: Limitations were set on mortgage lending, and the Consumer Financial Protection Bureau (CFPB) was started.

According to an article on Sunday (Oct. 4), WSJ notes that the smaller players in the financial industry are “proving surprisingly resilient by some measures.” In fact, though compliance costs may exist, there is a more fundamental issue in place, wherein lenders must grapple with a continued low interest rate landscape.

However, according to conventional wisdom, should rates rise — an event that could take place by the end of this year — then profits roll in again, and lenders of all sizes will be able to build capital cushions again. That, in turn, leads to a more sanguine lending environment for small enterprises and individuals.

Ahead of that anticipated rate hike, community banks have been able to lend at rates relatively faster than their larger brethren. The Federal Deposit Insurance Corp. reported that for the second quarter, loan balances at smaller players grew by 8.8 percent, year over year, roughly double the rate seen at big banks. And the profitability at smaller banks was only slightly less than bigger ones, with a respective 0.95 percent return vs. 1.08 percent return on assets. That closes a gap that at the onset of Dodd-Frank was three times larger.

The latest FDIC numbers come amid an environment where slightly more than 60 percent of the Dodd-Frank rules have taken effect.

The total amount of loans held by community banks has held roughly steady over the past five years at about 16.4 percent of total assets.

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