http://www.truth-out.org/news/item/33360-killing-off-community-banks-intended-consequence-of-dodd-frank
Killing Off Community Banks - Intended Consequence of Dodd-Frank?
Friday, 23 October 2015 00:00
By Ellen Brown, The Web of Debt Blog | News Analysis
At over 2,300 pages, the Dodd Frank Act is the longest and most
complicated bill ever passed by the US legislature. It was supposed to
end "too big to fail" and "bailouts," and to "promote financial
stability." But Dodd-Frank's "orderly liquidation authority" has
replaced bailouts with bail-ins, meaning that in the event of
insolvency, big banks are to recapitalize themselves with the savings of
their creditors and depositors. The banks deemed too big are more than
30% bigger than before the Act was passed in 2010, and 80% bigger than
before the banking crisis of 2008. The six largest US financial
institutions now have assets of some $10 trillion, amounting to almost
60% of GDP; and they control nearly 50% of all bank deposits.
Meanwhile, their smaller competitors are struggling to survive.
Community banks and credit unions are disappearing at the rate of one a
day. Access to local banking services is disappearing along with them.
Small and medium-size businesses - the ones that hire two-thirds of new
employees - are having trouble getting loans; students are struggling
with sky-high interest rates; homeowners have been replaced by hedge
funds acting as absentee landlords; and bank fees are up, increasing the
rolls of the unbanked and underbanked, and driving them into the
predatory arms of payday lenders.
Even some well-heeled clients are being rejected. In an October 19, 2015
article titled "Big Banks to America's Firms: We Don't Want Your Cash,"
the Wall Street Journal reported that some Wall Street banks are now
telling big depositors to take their money elsewhere or be charged a
deposit fee.
Municipal governments are also being rejected as customers. Bank of
America just announced that it no longer wants the business of some
smaller cities, which have been given 90 days to find somewhere else to
put their money. Hundreds of local BofA branches are also disappearing.
Hardest hit, however, are the community banks. Today there are 1,524
fewer banks with assets under $1 billion than there were in June 2010,
before the Dodd-Frank regulations were signed into law.
Collateral Damage or Intended Result?
The rapid demise of community banking is blamed largely on Dodd-Frank's
massively complex rules and onerous capitalization requirements. Just
doing the paperwork requires an army of compliance officers, and
increased capital and loan requirements are eliminating the smaller
banks' profit margins. They have little recourse but to sell to the
larger banks, which have large staffs capable of dealing with the
regulations, and which skirt the capital requirements by parking assets
in off-balance-sheet vehicles. (See "How Wall Street Captured
Washington's Effort to Rein in Banks" in Reuters in April 2015.)
According to Rep. Jeb Hensarling (R-Texas), chairman of the House
Financial Services Committee, the disappearance of community banks was
not an unintended consequence of Dodd-Frank. He said in a speech in July:
The Dodd-Frank architecture, first of all, has made us less
financially stable. Since the passage of Dodd-Frank, the big banks are
bigger and the small banks are fewer. But because Washington can control
a handful of big established firms much easier than many small and
zealous competitors, this is likely an intended consequence of the Act.
Dodd-Frank concentrates greater assets in fewer institutions. It
codifies into law 'Too Big to Fail' . . . . [Emphasis added.]
In an article titled "The FDIC's New Capital Rules and Their Expected
Impact on Community Banks," Richard Morris and Monica Reyes Grajales
concur. They note that "a full discussion of the rules would resemble an
advanced course in calculus," and that the regulators have ignored
protests that the rules would have a devastating impact on community
banks. Why? The authors suggest that the rules reflect "the new vision
of bank regulation - that there should be bigger and fewer banks in the
industry."
The Failure of Regulation
Obviously, making the big banks bigger also serves the interests of the
megabanks, whose lobbyists are well known to have their fingerprints all
over the legislation. How they have been able to manipulate the rules
was seen last December, when legislation drafted by Citigroup and
slipped into the Omnibus Spending Bill loosened the Dodd-Frank
regulations on derivatives. As noted in a Mother Jones article before
the legislation was passed:
The Citi-drafted legislation will benefit five of the largest banks
in the country-Citigroup, JPMorgan Chase, Goldman Sachs, Bank of
America, and Wells Fargo. These financial institutions control more than
90 percent of the $700 trillion derivatives market. If this measure
becomes law, these banks will be able to use FDIC-insured money to bet
on nearly anything they want. And if there's another economic downturn,
they can count on a taxpayer bailout of their derivatives trading business.
Regulation is clearly inadequate to keep these banks honest and ensure
that they serve the public interest. The world's largest private banks
have been caught in criminal acts that former bank fraud investigator
Prof. William K. Black calls the greatest frauds in history. The litany
of frauds involves more than a dozen felonies, including bid-rigging on
municipal bond debt; colluding to rig interest rates on hundreds of
trillions of dollars in mortgages, derivatives and other contracts;
exposing investors to excessive risk; and engaging in multiple forms of
mortgage fraud. According to US Attorney General Eric Holder, the guilty
have gone unpunished because they are "too big to prosecute." If they
are too big to prosecute, they are too big to regulate.
But that doesn't mean Congress won't try. Dodd-Frank gives the Federal
Reserve "heightened prudential supervision" over "systemically
important" banks, essentially putting them under government control.
According to Hensarling, writing in the Wall Street Journal in July,
Dodd-Frank is turning America's largest financial institutions into
"functional utilities" and is delivering the power to allocate capital
to political actors in Washington.
Thomas Hoenig, former president of the Federal Reserve Bank of Kansas
City, gave a speech in 2011 in which he also described banking as a
"public utility." (What he actually said was, "You're a public utility,
for crying out loud.") Six months later, Hoenig was appointed vice
chairman of the FDIC.
If the megabanks are going to be true public utilities, they probably
need to be publicly-owned entities, which capture profits and direct
credit in a way that actually serves the people. If Dodd-Frank's several
thousand pages of regulations cannot create a stable and sustainable
banking system, the regulatory approach has failed. The whole system
needs to be revamped.
Restoring Community Banking: The Model of North Dakota
Even if the megabanks were to become true public utilities, we would
still need a thriving community banking sector. Community banks service
local markets in a way that the megabanks with their standardized
lending models are neither interested in nor capable of.
How can the community banks be preserved and nurtured? For some ideas,
we can look to a state where they are still thriving - North Dakota. In
a September 2015 article titled "How One State Escaped Wall Street's
Rule and Created a Banking System That's 83% Locally Owned," Stacy
Mitchell writes that North Dakota's banking sector bears little
resemblance to that of the rest of the country:
North Dakotans do not depend on Wall Street banks to decide the
fate of their livelihoods and the future of their communities, and rely
instead on locally owned banks and credit unions. With 89 small and
mid-sized community banks and 38 credit unions, North Dakota has six
times as many locally owned financial institutions per person as the
rest of the nation. And these local banks and credit unions control a
resounding 83 percent of deposits in the state - more than twice the 30
percent market share that small and mid-sized financial institutions
have nationally.
Their secret is the century-old Bank of North Dakota, the nation's only
state-owned depository bank, which partners with and supports the
state's local banks. In an April 2015 article titled "Is Dodd-Frank
Killing Community Banks? The More Important Question is How to Save
Them," Matt Stannard writes:
Public banks offer unique benefits to community banks, including
collateralization of deposits, protection from poaching of customers by
big banks, the creation of more successful deals, and . . . regulatory
compliance. The Bank of North Dakota, the nation's only public bank,
directly supports community banks and enables them to meet regulatory
requirements such as asset to loan ratios and deposit to loan ratios. .
. . [I]t keeps community banks solvent in other ways, lessening the
impact of regulatory compliance on banks' bottom lines.
We know from FDIC data in 2009 that North Dakota had almost 16
banks per 100,000 people, the most in the country. A more important
figure, however, is community banks' loan averages per capita, which was
$12,000 in North Dakota, compared to only $3,000 nationally. . . .
During the last decade, banks in North Dakota with less than $1 billion
in assets have averaged a stunning 434 percent more small business
lending than the national average.
The BND has also been very profitable for the state and its citizens.
Over the last 21 years, the BND has generated almost $1 billion in
profit and returned nearly $400 million to the state's general fund,
where it is available to support education and other public services
while reducing the tax burden on residents and businesses.
The partnership of a state-owned bank with local community banks is a
proven alternative for maintaining the viability of local credit and
banking services. Other states would do well to follow North Dakota's
lead, not only to protect their local communities and local banks, but
to bolster their revenues, escape Washington's noose, and provide a
bail-in-proof depository for their public funds.
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