New regulations imposed on banks since the financial crisis and Great Recession are primarily directed toward large banks, especially banks that regulators deem systemically important. However, small banks have argued that the stricter regulations are excessively costly for them. Often they have identified the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 as the main culprit, and this charge has been taken up by politicians who have cited the higher regulatory burden on small banks as a reason that various parts of Dodd–Frank ought to be repealed. Small banks have also complained that new capital requirements under the international Basel III accord have been unduly burdensome. Recently, some regulators have made proposals to lower regulatory costs for small banks.1
We examine the effects of regulatory changes since the Great Recession on banks with assets below $10 billion, which we refer to as small banks.2 We show that new home mortgage lending rules imposed by the Consumer Financial Protection Bureau likely significantly affected small banks, despite a wide range of exemptions that limit the effects of new regulations. Another important line of business for small banks, commercial real estate lending, may also be significantly affected by new risk-based capital requirements. However, regulations on debit card transaction fees do not appear to have hurt small banks, despite complaints from bankers.
This article appeared in the First Quarter 2016 edition of Economic Insights. Download and read the full issue.
Concern about the impact of regulatory costs on small banks has two main rationales. First, as shown in our third quarter 2015 issue of Banking Trends, small banks play an outsize role in small business lending in the U.S. Second, small bank failures do not pose the same risks to financial stability as do large bank failures.
In this article, we do not address the effects of the new regulations on large banks.