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Is Dodd-Frank the End of Community Banks?

By Gretchen Wegrich Updated on 3/22/2013

By Gretchen Wegrich

The shift toward banking locally may have taken several steps back with the passage of the Dodd-Frank Act, which community banks say imposes costly regulations and effectively prevents new local banks and credit unions from forming.

Enacted nearly 3 years ago, the Dodd-Frank Act was created in order to reform the financial services industry and protect consumers. However, the overall affect of the Dodd-Frank Act on local banks has been deemed harmful, reported the Federal Deposit Insurance Corporation (FDIC) at this week's Financial Institutions Subcommittee Meeting.

For many local banks, the Dodd-Frank Act regulations are confusing, complex and voluminous...so much so that community banks report hiring outside consultants to help interpret and implement new or changing rules within the required timeframe.

No new community bank charters have been granted since 2011, due in part to the burden imposed on local banks by the Dodd-Frank Act.

"We must keep up the discussion amongst policy makers, regulators, and community bankers about ways to reduce this growing burden," said Financial Institutions Subcommittee Charwoman Shelley Moore Capito, R-West Virginia.

"We need to have safely run financial institutions in our local communities, but we must ensure that the costs of compliance do not outweigh the benefits and that regulations emanating from Washington can be handled by Main Street lenders,” Capito added.

The "bank local" movement blossomed as a result of the financial crisis. In 2012, CNN reported that membership in credit unions was at an all time high of 91.8 million members. The news service attributed the increased membership to the American public's loss of faith in large banking institutions.

Following the financial crisis, many Americans decided to shift their money into community banks, which promised to invest in local businesses and offer more personalized and transparent services. Grassroots campaigns sprouted around environmental and community issues, often calling for citizens to align their finances with their values.

Everyone from professional surfers to the Huffington Post initiated 'move your money' campaigns asking the public to ditch their bank accounts with the Too Big To Fail crew. The campaigns targeted banks such as Bank of America, Citigroup, Wells Fargo and JP Morgan Chase that were receiving huge taxpayer-funded bailout checks.

Now, however, the 'big banks' may be gaining ground as the formation of new credit unions and community banks has slowed to zero.

"The FDIC study attempts to quantify the growing burden of complying with the myriad of financial regulations for community financial institutions," said Capito, noting that issues with the cost of compliance had registered almost immediately following the enactment of the Dodd-Frank Act.

Capito aded, "In January of 2011, just six months after the Dodd-Frank Act was signed into law, we heard from a community banker in West Virginia who already hired an additional compliance officer to deal with the increasing complexity of compliance.”

The Financial Institutions Subcommittee meeting was the first in a series of hearings focusing on how the burden of Dodd-Frank Act regulations is impacting financial institutions accross the nation.

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About The Author:
Gretchen Wegrich
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.

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