Impact of the Dodd-Frank Act on Small Banks: Too Soon to Say (GAO Report)

This report examines (1) the significant changes community banks and credit unions have undergone in the past decade and the factors that have contributed to such changes, and (2) Dodd-Frank Act provisions that regulators, industry associations, and others expect to impact community banks and credit unions, including their small business lending.

GAO analyzed regulatory and other data on community banks and credit unions; reviewed academic and other relevant studies; and interviewed federal regulators, community banks, credit unions, state regulatory and industry associations, academics, and others. CFPB, federal banking regulators, and the Securities and Exchange Commission provided technical comments on this report, which GAO incorporated as appropriate. CFPB and the National Credit Union Administration generally agreed with the report.

Lofchie Comment: The report takes up two related, but distinct, questions: (i) will Dodd-Frank rule makings raise costs for small banks in an absolute sense; and (ii) how will any such change in expenses affect small banks' competitive position relative both to large banks, on the one hand, and non-banks engaged in like activities on the other. The report largely ducks the first question, pointing to the fact that there are hundreds of regulations still to be adopted whose cost therefore cannot be assessed (on the other hand, lots of regulations generally do entail at least some costs). As to the competitive question, the report is ambiguous. It points out that regulatory costs are to a good extent fixed costs, and thus these tend to hit smaller institutions more than larger. On the other hand, it raises the possibility that Dodd-Frank regulations may hit both larger banks and nonbanks harder than small banks, thus improving small banks' position relative to their competitors. Although the report is inconclusive, it does provide some interesting discussion not only of regulatory costs, but also of the ways in which regulations are being imposed in different ways on different types of institutions; e.g., that the CFPB will not directly regulate small banks. This raises questions as to the extent to which differential regulation should be used to give some firms a competitive advantage. For details on this point, see Appendix II, from pages 72-77. The section descriptions (beginning on page 73) detail the various Dodd-Frank provisions that are expected to impact small banks and credit unions, as well as the special exemptions that they receive.

View report in full here (links externally to GAO website).