Three Charts That Show How Dodd-Frank Is Killing Small Banks

The Dodd-Frank Act of 2010 was hailed by its advocates as the regulatory answer to the excesses of the Big Banks that led to the financial crisis.

But just about the only thing Dodd-Frank has accomplished is the slow destruction of small community banks.

The idea behind Dodd-Frank was to add mountains of new regulations to the banking industry to prevent misbehavior.

But instead of putting a leash on the Too Big to Fail Banks, Dodd-Frank has actually helped them get even bigger and more powerful at the expense of small banks.

"It was a monumental victory for the Too Big to Fail banks," said Money Morning Capital Wave Strategist and Wall Street Insights and Indictments editor Shah Gilani. "What people don't understand is that destroying the smaller banks for the benefit of the Big Banks was the game."

The Mercatus Center at George Mason University last month created a series of charts illustrating just how bad this trend has gotten.

The first chart shows how the number of large banks has increased by 29% since 2000, while small banks (defined as those with $10 billion in assets or less) declined by 24%.

The second chart shows an even more troubling trend. The share of total U.S. banking assets of the nation's five largest banks – led by JPMorgan Chase & Co. (NYSE: JPM) and Bank of America Corp. (NYSE: BAC) – have soared from 30.1% in 2000 to 46.6%, while the share of small banks has shrunk to just 18.6% from 30.1%.

A lot of the damage has occurred since the passage of Dodd-Frank, as seen in the third chart. The Mercatus study said that between July 2010 and the third quarter of 2013, the United States lost 650, or 9.5%, of its small banks. And the small banks' share of banking assets fell 18.6%, while their share of domestic deposits has slipped 9.8%.

Although the Mercatus study points out that some of the decline of small banks is organic, resulting from mergers and consolidation, a large part of it has been driven by "increasing regulatory burdens," which have accelerated since the passage of the Dodd-Frank Act.

"Regulatory compliance can be a particular challenge for small banks with limited compliance expertise," write the report's authors, Hester Pierce and Robert Greene. "Regulatory expenses absorb a larger percentage of small banks' budgets than of their larger counterparts' budgets."

So small banks have had no choice but to either merge with a larger bank (or each other), or in at least one case, Shelter Financial Bank in Missouri, simply shut their doors.

And the worst is yet to come…

David Zeiler

About the Author

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David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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