Harvard Study Confirms Dodd-Frank’s Harm to Main Street

Literally since the day the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama, my Competitive Enterprise Institute colleagues and I have predicted its harshest effects would fall on community banks. “While the bill claims to crack down on excesses on Wall Street, its harshest impact will likely be on Main Street businesses that had nothing to do with the crisis,” I wrote on FoxNews.com on July 15, 2010, the day President Obama signed the bill.

Since then, numerous studies, as well as testimonials from community bank officials, have proven this prediction correct. Yet much of the media and politicians still peddle the myth that Dodd-Frank only hurts Wall Street, and thus, repealing or easing sections of Dodd-Frank would benefit “big banks” at the expense of Main Street.

But maybe a new confirmation of Dodd-Frank’s harm to community banks will get attention because of its unlikely source: the John F. Kennedy School of Government at Harvard University. Two researchers at the Kennedy School’s Mossavar-Rahmani Center for Business and Government have just produced a study concluding that Dodd-Frank accelerated the decline of America’s community banks.

While acknowledging that community banks’ share of financial assets has been falling since 1994, authors Marshall Lux and Robert Greene find that “since the second quarter of 2010—around the time of the passage of the Dodd-Frank Act—their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.”

And the authors find that some of provisions most harmful to community banks were among those aimed squarely at Wall Street. The Volcker Rule, often called “Glass-Steagall Lite,” put severe restrictions on banks’ “proprietary trading” to earn profits, with the false justification that trading was inherently more risky than lending.

It turns out, just as I wrote when the Volcker Rule went in effect, that community banks do some trading to hedge the risk of the loans they make. But as a result of the Volcker Rule, the Harvard study finds, “community banks have sold assets simply due to uncertainty.”

The Kennedy School authors recommend that policymakers identify “what regulatory conflicts are unnecessarily harming community banks, to ensure better coordination and to reduce unintended consequences stemming from conflicting regulatory objectives.” For once, I am in the unique position of saying that maybe the country would be better off if governed by some members of the Harvard faculty.