Small Banks Hurt by Dodd-Frank

Dodd-Frank hit banks and financial firms with a host of new regulations, but lawmakers in the new Congress have indicated an intention to reform the massive law. Ike Brannon, writing for the American Enterprise Institute, says that’s a good idea, explaining that large banks are better off than small banking institutions under the rules. Why?

– Because big banks are larger, they can more easily spread out the regulatory costs than can small banks, whose Dodd-Frank costs constitute a much larger proportion of their overall costs.
– The federal government’s “too big to fail” policy sent a message to investors that the government is willing to bail out large banks, making larger institutions more attractive.

According to Brannon, Dodd-Frank created another problem: while large banks have more money to lend, they are less knowledgeable about people in small communities, so they tend only to offer safe loans. Brannon says would-be entrepreneurs in those towns must turn to community banks, which now have less money available for lending.

What’s the solution? Brannon says Congress should require financial regulations to undergo cost-benefit analysis. Additionally, he suggests making two tiers of financial regulations so that regulations directed at large institutions aren’t also imposed on small community banks.

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