Dodd-Frank Act Strangles Small Banks

The 2010 Dodd-Frank Act was enacted partly to end “too-big-to-fail” banks, but it has done quite the opposite. It has curbed competition with big banks by eliminating competing small banks whose failure would not endanger the financial system. It used to be that 100 new banks were created every year; now, not one is created in a typical year.

As the Cato Institute’s Walter Olson notes, the “Dodd-Frank law is strangling community banks. More on community banks here, from Scott Beyer, and in several past posts.” He “previously noted this Wall Street Journal account from March on one of the most dramatic aspects of the trend, the throttling of de novo bank formation: ‘Based in a rural village in the heart of Amish country, Bank of Bird-in-Hand is the only new bank to open in the U.S. since 2010, when the Dodd-Frank law was passed and enacted. An average of more than 100 new banks a year opened in the three decades before Dodd-Frank.’”

This completely contradicts the law’s sponsors, whose “statute itself declared that it would ‘end too-big-to-fail.’” Consumers have suffered: “Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so.” As CEI’s Iain Murray has noted, “rules issued under Dodd-Frank have harmed some of the poorest Americans, who have seen their insurance made more expensive, their banking choices reduced, and their bank fees increased. Many have been forced out of the banking system altogether” potentially leading to the return of “loan sharks.”

CEI’s board chairman, Prof. Todd Zywicki, testified before the House Financial Services Committee about the harmful effects of Dodd-Frank, which “imposed a regime that instead has led to higher prices, less innovation, and less choice” in “mortgages, bank accounts, and credit cards,” increasing “consumer dependence on less preferred products like payday loans, pawn shops, and check cashers.”

Dodd-Frank’s harm to poor people in America pales in comparison to its harm to impoverished people in Africa. A single rule in Dodd-Frank—its “conflict minerals” rule, known in Africa as the “Obama Law”—increased violence by 143 percent and looting by 291 percent in the already violent nation of the Congo, according to the Parker-Vadheim study. It did this partly by converting many of the country’s “militia groups from ‘stationary’ bandits, which extract taxes from people but otherwise do little harm, into what are known as ‘roving’ bandits,” who loot, rape, and murder with increased rapacity. This fueled violence in a country that had just begun to recover from civil wars that had killed millions. As we noted earlier, Dodd-Frank conflict minerals regulations have also caused starvation in the Congo, harmed U.S. businesses, and resulted in increased smuggling.