By John M. Pachkowski, J.D.
James DiSalvo and Ryan Johnston of the Federal Reserve Bank of Philadelphia have examined the effects that regulatory changes since the Great Recession have had on small banks—those with assets below $10 billion.
Their analysis, “How Dodd-Frank Affects Small Bank Costs,” appeared in the debut issue of Philadelphia Fed’s Economic Insights and examines three specific areas: the qualified mortgage rule adopted by the Consumer Financial Protection Bureau; regulations implementing the Basel III Capital Accord; and Dodd-Frank’s Durbin Amendment. DiSalvo and Johnston also examined the compliance costs that affect small banks.
Qualified mortgages. Although the CFPB’s qualified mortgage rule was “designed to force banks to maintain higher lending standards for home mortgages” by imposing “rigorous standards of proof that a loan is not high risk,” DiSalvo and Johnston noted that small banks gained a “key benefit” in that they are protected against lawsuits by borrowers and against attempts by borrowers to avoid foreclosure.
As for the effect the qualified mortgage rule has had on small banks’ mortgage lending, the authors found that the qualified mortgage rule “affects a significant share of mortgage lending by small banks, and by some measures, the effect appears to be greatest for the smallest banks.”
Capital requirements. DiSalvo and Johnston found that the changes made by Basel III Capital Accord, especially to risk weighting on commercial real estate (CRE), affected small banks since they invest relatively heavily in commercial real estate. They concluded that the new capital requirements “potentially affect a modest, but certainly not insignificant, portion of small banks’ CRE portfolios.”
Durbin Amendment. The Durbin Amendment of Dodd–Frank requires regulators to impose a ceiling on the interchange fees that covered banks charge for debit card transactions. It was noted by the authors that there was substantial evidence that the ceiling did lower interchange fees collected by banks with assets above $10 billion, from around 44 cents to about 22 cents per transaction’ but no such decline for small banks. DiSalvo and Johnston also found no evidence to support the claim that competitive forces have effectively imposed the interchange fee ceiling on small banks. However, they did caution that “it is possible that longer-term competitive effects might yet put small banks at a disadvantage.”
Compliance costs. Finally, DiSalvo and Johnston touched upon compliance costs affecting small banks. They noted that “reports of the costs of regulatory compliance have been largely anecdotal,” but “the magnitude of the rise in regulatory costs due to Dodd–Frank and the accompanying regulatory changes since the Great Recession is an empirical question that will require more time and analysis to determine.”
For more information about Dodd-Frank, subscribe to the Banking and Finance Law Daily.
