Illogical Conclusions From a Shoddy Report

On Aug. 10, the White House Council of Economic Advisors issued a report citing that the Dodd-Frank Act (DFA) has had no impact on community banks. Really? These guys should be stripped of their economist badges if they expect any of us to believe this self-serving administration whitewash. Read this report for yourself, as I will not do it justice. There are far too many “conclusions” reached with incomplete or poorly analyzed data.

The analysis suggests that new regulatory requirements are not causing the declining numbers of community banks because, since 2010 when DFA was signed, lending growth and geographic reach remain strong. These economists might have considered that the economy has been improving since that time; as the saying goes, a rising tide raises all ships. Assuredly the 1,708 community banks that have disappeared since July 2010 would beg to differ with this view that DFA had no bearing on their sale or failure. I talk with bankers regularly, and they tell me that DFA is having a terribly negative effect. Dodd-Frank has been the primary cause of hundreds, if not thousands, of decisions to sell banks. Not all of these sales decisions have yet been consummated, but most will be.

The report also cites the following as a reason for the decline in de novo banks: “macroeconomic conditions in recent years have also contributed to the lower rate of new entry by small banks.” Allegedly this situation also is a primary factor in the decline of banks under $100 million in assets. However, there is no supporting evidence to support this conclusion. More likely is that the drag of DFA on the economy is one of the causes of this macroeconomic condition.

The report goes on to tout all that the administration has done policy-wise to help community banks. Most of these efforts have been initiated by Congress at the pleading of the banking community. More definitive actions that would really help, beyond rolling back much of the unnecessary regulatory burden, are not even mentioned. These actions include putting banks on a level playing field with credit unions and the Farm Credit System, which could entice investors to start more de novo banks.

The report presents five facts “relevant to the debate” (their words, not mine):

  1. Lending by all but the smallest community banks has increased since 2010. The facts to support this ignore that an improving economy has created more loan demand.
  2. Access to bank offices at the county level remains robust. Banks are going to go where people and businesses are, so it will always remain robust.
  3. The average number of bank branches per community bank has increased. Not a brilliant observation. Larger community banks buying smaller community banks has to raise the number of branches per surviving bank, unless those acquiring banks close all of the offices of the acquired bank. Then what would be the purpose of the acquisition?
  4. Over the past two decades, the number and market share of the smallest community banks ‒ those with assets less than $100 million ‒ has been declining. Under this item, the authors cite that the biggest declines occurred before DFA was signed. Actually, there were nearly 20,000 banks and thrifts in 1984, and more than half of them had sold prior to the signing, so there were fewer banks under $100 million to be sold since 2010.
  5. Macroeconomic conditions likely explain a substantial portion of the drop in new bank entry in recent years. The report cites several possible reasons for this trend, but amazingly ignores that the regulatory burden on these potential new entrants might be driving them away.

I have only scratched the surface of this illogical report. I urge you to read it and draw your own conclusions.

– S. Joe DeHaven

2 Responses to Illogical Conclusions From a Shoddy Report

  1. Doug Bennett says:

    Great report, Joe. Another huge example of how this government does not report facts – lying is the common word for it. Banks are going to have to be louder, stronger and willing to take some/more arrows before it changes.

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