Dodd-Frank Expected to Strain Community Banking

The Dodd-Frank bank reform act was passed in 2010; three years later it has yet to be fully implemented. Supporters of the bill claim the financial services lobby has delayed the regulations from taking effect, while the bill's critics say they have good reason for such behavior, as Dodd-Frank would require small regional and community banks to adhere to the same rules and regulations as "too big to fail" banks like J.P. Morgan Chase.

That, says Lynn Mitchelson -- president and CEO of American Bank of Baxter Springs, Kansas -- is the problem:

I think they find it difficult to differentiate between the "too big to fail" banks and community banks. The ability of community banks to effectively lobby and be differentiated from the "too big to fail" banks has not been successful yet.

Mitchelson has more than 50 years of business-lending experience in the Kansas City area. More than 25 years of this were spent in Johnson County following his founding of the Corporate Woods State Bank in 1980, and through subsequent sales of the bank to Bank IV, Boatmen’s, NationsBank, N.A., and Bank of America. Mitchelson stopped short of saying Dodd-Frank is bad legislation, partially because the bill has not been fully implemented:

I think we're all still sorting it out. I don't believe there's a true complete understanding of what Dodd-Frank will entail. I think the biggest concern I hear among community bankers is what it may do to single family mortgage lending. We don't want this new national regulation to affect our ability to serve the market.

Congressman Steve Pearce (R-NM) says Dodd-Frank's cookie-cutter approach to regulation is part of the problem:

Dodd-Frank’s one-size-fits-all approach saddles community banks with the same regulations as Wall Street giants -- there is no commonsense distinction made to account for differences in how they operate, or their vital role in small communities across the country. Community banks have the power to get our economy going again, by making local loans and jump-starting small business. Instead, they’re being regulated out of existence. In New Mexico, I constantly hear from community banks that the Dodd-Frank act spells the beginning of their end.

Mitchelson agreed that changes need to be made to the regulations to make them more friendly to small banks:

That's a refinement that has to be imposed on the Dodd-Frank legislation, as there's a realization that Main Street needs community banks to get this economy going again. That's where the lending happens for small business. You can't stifle community bank lending with national legislation and then have Main Street prosper. It's just not going to happen.

Moreover, community banks did not have a hand in the financial meltdown of 2009, as Mitchelson points out:

There's not what I would call a good level of understanding on the part of the American public as to what caused the crisis, what part of it was caused by banks and which banks were involved. To the extent the banking industry was involved it was those banks that dealt in derivatives, and that's a business most community banks ... aren't in. There's nothing evil in derivatives in and of themselves, they are a useful tool for mitigating interest rate risk if used properly.

Mitchelson says the problem lies with the "superbanks," which are "too big to fail, too complex to manage, and too powerful to regulate."

Senator Mike Crapo (R-ID) noted in a recent Senate hearing:

Community banks are disproportionately affected by increased regulation because they are less able to absorb additional costs. The majority of community banks today have $250 million or less in assets, according to the GAO -- which often translates into a one- or two-person compliance department.

American Bank has only three branches, all in Kansas: a main office in Baxter Springs, one in Galena, and one in Columbus. It epitomizes the community bank. They employ two people -- upper-level employees -- who spend the majority of their time on compliance issues:

What has happened is the "too big to fail" have not been regulated because they're too big to regulate. [But] they're not hesitant to tell someone our size [what to do] because we're not considered an essential element of the national economy.

Mitchelson reiterated that it's simply too early to tell if the regulations will be good or bad for the industry, but noted that as of now the bill looks damaging:

It looks like overkill to begin with, but maybe if it gets modified it'll be good regulation.