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ABA baffled by White House economists’ conclusions on Dodd-Frank

ABA baffled by White House economists’ conclusions on Dodd-Frank

By Kevin Dobbs

Kevin Dobbs is a senior reporter and columnist. The views and opinions expressed in this piece represent those of the author or his sources and not necessarily those of S&P Global Market Intelligence. Follow on Twitter @Kevin1Dobbs.

The White House Council of Economic Advisers says the 2010 Dodd-Frank financial reform legislation that led to mounds of new regulations in the aftermath of the financial crisis should not get blamed for community bank consolidation.

The council, led by Chairman Jason Furman, said in an August report that small-bank consolidation is a long-term trend, the result of “structural challenges dating back to the decades before the financial crisis,” including demographic shifts from rural areas to cities and economic recessions.

“There’s no evidence at all that Dodd-Frank has had a negative impact on this sector,” Furman told The Wall Street Journal.

The American Bankers Association finds that bewildering.

“Having thoroughly reviewed the report I must admit to being baffled by your findings,” ABA President and CEO Rob Nichols said in an August letter to Furman. The “notion that the Dodd-Frank Act — and its 24,000 pages of proposed and final rules — has had no impact on community banks is simply untrue.

“A conversation with any community banker would dispel this forced conclusion,” Nichols added. “The thousands of new regulations that have been imposed on community banks is an enormous driver of decisions to sell to a larger bank.”

More than 280 banks — the vast majority of them community lenders — agreed to sell in 2015. More than 150 have inked deals to sell so far this year, according to S&P Global Market Intelligence data.

Insignia Bank in Florida is among them. The bank, with about $250 million in assets, said this month it would sell to the largerStonegate Bank. In an interview, Insignia Chairman and CEO Charles Brown III said his bank did not have to sell, but the benefits of joining forces with a larger company, including the ability to better absorb compliance costs, factored into Insignia’s decision-making.

Regulatory burden “has almost always” played a role in community bank M&A in recent years, Brown said.

Jon Winick, president of bank consultancy Clark Street Capital, said in an interview that Dodd-Frank is not the only reason banks sell. Fierce competition, choppy economic conditions, low interest rates and rising technology costs, among other challenges, play into sellers’ thinking. But regulatory burden “certainly” is an important influence on many, he said.

“Anyone who believes that the community bank landscape has not been adversely affected has been living in an ivory tower somewhere with no grasp of what is happening in the real world,” he said.

Interviews over the past several years with selling bank executives back that up. Most have cited lofty compliance costs as a key reason to sell. Most have argued that a slew of new regulations have forced small banks to divert precious resources and time away from dealing with customers and toward managing soaring levels of paperwork and meeting examiners’ rising demands. Ultimately, many have said, that was not a sustainable way of doing business. Selling became inevitable.

After Citizens National Bancorp Inc. this spring decided to sell to Simmons First National Corp., for example, Citizens Chairman and CEO Paul Willson said in an interview that both the volume and complexity of new regulations written under Dodd-Frank played a big role in his company’s decision to throw in the towel.

“It takes so much more time, and it is so much more complicated,” he said. “It has become so much more difficult to serve our customers.”

While there are exceptions for community banks under $10 billion in assets to certain rules under Dodd-Frank, Nichols of the ABA said in his letter that often “rules intended for the largest banks are too often considered ‘best practices’ for all banks, compounding the hardship for smaller institutions.”

What is more, he said, “arbitrary size thresholds create disincentives for community banks to grow because of the significant regulation that is added as soon as the threshold is crossed. This limits the services they could provide because of arbitrary rules, not business decisions to meet community needs.”

Against that backdrop, he suggested, consolidation could carry on far too long.

“If this trend continues unabated, there will be fewer financial services in communities and less economic growth,” Nichols said.”Whether intended or not, the Dodd-Frank Act has added fuel to industry consolidation, reduced flexibility for product offerings, and increased the cost of providing financial services — a cost that is ultimately borne by customers.”

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