On July 18, the House Committee on Oversight and Government Reform held a hearing regarding "Regulatory Burdens: The Impact of Dodd Frank on Community Banks." In her testimony, Wake Forest University Professor Tanya Marsh discussed how "Dodd-Frank builds on decades of 'one-size-fits-all' regulation of financial institutions, an ill-conceived regulatory framework that puts community banks at a competitive disadvantage to their larger, more complex competitors."
In her testimony, Marsh argued that "The imposition of regulatory burdens on community banks without attendant benefits ultimately harms both consumers and the economy by: 1) forcing community banks to consolidate or go out of business, furthering the concentration of assets in a small number of mega-financial institutions, and 2) encouraging standardization of financial products, leaving millions of vulnerable borrowers without meaningful access to credit."
She could have been speaking about small broker-dealers.
Sound Familiar?
As a broker-dealer recruiter, I find Professor Marsh's description eerily similar to the struggles facing the small broker-dealer. Throughout much of her testimony, you could have replaced the term "community bank" with "small broker-dealer" and the story would still hold true.
In her testimony, Professor Marsh continued that "with respect to compliance, community banks are at a disadvantage because they do not have their larger competitors' sophisticated legal and compliance staffs to interpret the new rules and regulations and look for effective ways to comply with those regulations without compromising their ability to serve customers and earn profits."
A study released in 2012 by the Federal Deposit Insurance Corp. reinforces the detrimental effect of increased regulation on small community banks. According to that study, "The facts of bank consolidation are striking. From 1984 to 2011, the number of small banks — those with assets of less than $25 million — declined 96%." Meanwhile, the number of banks insured by the FDIC has shrunk, while large banks have significantly grown their share of total bank assets.
We know from long experience that smaller businesses are disproportionally impacted by regulatory costs. The Office of Advocacy of the U.S. Small Business Administration (SBA) has been studying the cost to small businesses of regulation since 1995. A 2010 SBA study concluded that small businesses "bear the largest burden of federal regulations. As of 2008, small businesses face an annual regulatory cost of $10,585 per employee, which is 36% higher than the regulatory cost facing large firms." That was before Dodd-Frank.
