In a response to a question about regulation, Romney said Dodd-Frank, the set of banking reforms that Obama pushed for and Congress passed in the wake of financial crisis, was an example of a law that's hurting the economy. Romney said that by specifying certain banks as Too Big to Fail, the government has given "the biggest kiss to New York banks I've ever seen." As a result, Romney said that's making it tough for smaller banks to compete.
"We need to get rid of that provision because it's killing regional and small banks," said Romney.
Romney said 122 small and community banks have failed since the passage of Dodd-Frank. In fact, the mine field for small banks might be even worse than Romney describes. In the two years, since the passage of Dodd-Frank in mid-July 2010, 196 banks have failed, most of which would qualify as small or community banks.
But it's not clear that has anything to do with Dodd-Frank. In the two years leading up to Dodd-Frank, 256 banks failed, albeit at least part of that time includes a banking crisis, but many of the failures of the past two years have been related to the credit crunch as well. Most banks fail because they make bad loans, not because they are being run over by larger rivals.
What's more, Dodd-Frank doesn't appear to be giving the nation's mega banks any more of an advantage than they had before. The four biggest banks have increased lending slightly faster since Dodd-Frank than their smaller rivals, 4% vs. 1%. But loan growth for both groups has been slow.
And the recent falling mortgage rates have disproportionally helped the big banks. But mortgage lending is an area in which the national banks have long dominated, well before Dodd-Frank. Take home loans away and the difference in lending growth is even smaller.
The argument that some people make is that designating the biggest banks as "systemically important financial institutions," as Dodd-Frank requires, makes it much cheaper for them to borrow, since no one thinks the government will allow them to fail. The result is higher profits and a big advantage that will allow the mega banks to run everyone else out of town.
But it doesn't appear to be turning out that way. According to the Federal Deposit Insurance Corporation's quarterly reports, the net interest margin, which is a measure of the difference between what it costs a bank to borrow and what it can lend its money out at, at the nation's 28 banks that have over $10 billion in assets has fallen since the passage of Dodd-Frank. The same figure at community banks has remained essentially unchanged, and is now higher for the small banks, meaning they're loans are more profitable, not less.
Another measure of profitability, return on equity, is up for the big banks by 24% since the passage of Dodd-Frank. But in the same time, the ROE of small banks has soared 223%.
Yes, being seen as too big to fail might lower borrowing costs, but Dodd-Frank imposes other limits on large banks, like higher capital requirements and more oversight, that will raise their costs as well. What's more, the government hasn't actually officially named what banks are systemically important. So any lovin' they have gotten so far is from the market, not Dodd-Frank, or Obama.
Small bank executives have bitterly complained about Dodd-Frank. (So have executives of larger banks, by the way. Jamie Dimon, we're looking at you.) One executive of a small bank in Texas is the lead plaintiff in a case that claims Dodd-Frank is unconstitutional. But small banks are not complaining about the part of Dodd-Frank that has to do with their larger rivals. In fact, that's a part of the law they like. What competitor wouldn't?
Cam Fine, who heads up the Independent Community Bankers of America, which is the largest trade group for small banks, says he would have liked to see Dodd-Frank break up the big banks. He says he agrees with Romney that anything that codifies the policy that some banks are Too Big to Fail is a bad thing. But he's not sure Dodd-Frank does that. In all, he says he thinks Dodd-Frank is an improvement when it comes to the big banks. Imposing higher restrictions on the big banks, as Dodd-Frank does, Fine says is well intentioned and "good regulation."
"I think Dodd-Frank is a mixed bag," says Fine. "But the part that deals with big banks I was happy with."
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