Dodd-Frank reform: Why we should care about the lack of new banks


When was the last time a new bank started in Alaska? About 17 years ago, when Northrim Bank opened its doors.

Yet there was a time when people got together, pooled their funds, and started a community bank. Now, an entire generation of Americans is growing up during a time when “no new banks” is the new normal.

In fact, there has been a sharp reduction in community banks.  In 1990 the U.S. had more than 12,300 commercial banks in operation. But, by the end of 2016, eight years after the financial crisis of 2008, only 5,083 remained. And among those, a much larger percentage of total bank assets are concentrated in the nation’s five or so largest commercial banks.

More to the point, small businesses in the U.S. are having a far tougher time getting loans than they did pre-crisis. Yet small businesses remain the backbone of the U.S. economy. Ask a small business person if it’s harder to get a loan these days and they’ll tell you it’s a nightmare.

This drag on commerce in America is not the result of natural market forces — it is a direct outcome of the Dodd-Frank Wall Street Reform and Consumer Protection Act, whose 22,000 pages of regulation is smothering the lending sector. Banking has become forbiddingly restrictive under Dodd-Frank, with government regulators now having far more control over who qualifies for loans than they ever did, prior to the law’s passage.

Today, the House Committee on Financial Services began the mark up of the Financial CHOICE Act, which would replace Dodd-Frank. It is a Republican-led effort and it’s running into headwinds with Democrats, of course, who are defending Dodd-Frank as protection for consumers.

But it’s not protection. It’s hurting consumers.

“It has been almost seven years since the passage of the Dodd-Frank Act. We were told it would lift our economy, but instead we are stuck in the slowest, weakest, most tepid recovery in the history of the Republic,” said House Financial Services Chairman Jeb Hensarling, R-Texas, as he introduced the Financial CHOICE Act. He called Dodd-Frank a form of politicized lending.

Must Read Alaska spoke off the record with Alaska bankers who confirmed that it takes a lot longer for homeowners, consumers, and businesses to get loans these days. A home loan that used to take 30 days, now takes 45. And a commercial loan can take much longer.

In fact, for business loans, it’s now the federal government through Consumer Financial Protection Bureau and its suffocating web of regulations and overbearing bank examiners making de facto decisions on loans, not bankers.

“Consumers can’t get loans in anything that would be considered a respectable amount of time,” one Alaska banker told us. That means consumers stop trying to get loans. And that means consumers are not engaged in the economy.

This banker said his institution spends $1 million more a year just to comply with Dodd-Frank, and in the range of $2-3 million a year to comply with all federal regulations.

(U.S. Chamber of Commerce graph)

Rep. Hensarling also wants to dismantle the Consumer Financial Protection Bureau, which was the creation of Sen. Elizabeth Warren, when she was still a law professor at Harvard, at the direction of President Barack Obama.

The CFPB has become a policing agency, rather than a consumer protection agency, critics warn. Bankers have less and less control over who gets loans, and the federal government has increasing authority.

Hensarling described the CFPB as making rules that are unfair, deceptive, and abusive.

Rep. Maxine Waters, D-Calif., said Democrats will fight. “This bill must not become law. There is too much at stake for consumers and for our whole economy.” She called the bill “dead on arrival.”

Democrats are so fiercely fighting reform that today they are insisting the entire 500-page CHOICE Act be read into the record, word by word — a form of filibuster in committee. The reading of the bill started at roughly 8 am Alaska time and was continuing as of 10 am.

Tuesday’s hearing is the latest in a series of partisan battles on the Financial Services hearing over the future of Dodd-Frank.

What Rep. Waters and her ilk are actually fighting is stronger economic growth. Since the passage of Dodd-Frank, the U.S. economy has been “stuck in second gear,” with the weakest economic expansion since the 1930s.

That is not a coincidence.

If one needs confirmation of the stifling effects of Dodd-Frank, look no further than this:  Since 2010, the U.S. has had only one new bank charter, an Amish bank in Pennsylvania — Bank of Bird-in-Hand, which started in 2013.  Because, perhaps, only the Amish have the patience to deal with the federal government.

Hensarling’s bill would give regulatory relief for dozens of provisions now in Dodd-Frank, but although it’s likely to pass the House, it will face headwinds in the Senate.

Ironically, Wall Street bankers in the top tier have started to like Dodd-Frank, because it keeps the competition down, making the nation’s largest institutions more profitable.

In that sense, Dodd-Frank is a law that only the biggest banks (and economically illiterate Democrats) can love.