Dodd-Frank forced my neighborhood community bank to sell
I got a letter this month from the only community bank serving the small town of Deephaven where I live. The branch is just over the border in Minnetonka.
Americana Community Bank informed me that they are selling the branch to Flagship Bank Minnesota. “The banking world has changed dramatically…. While the needs of our customers and our shareholders have not changed significantly in that timespan, the federal and state regulations that rule our business have changed. In great part because of those rule changes, the ownership and management of American Community Bank have made the difficult decision to sell….”
The letter came just as we released the transcript of Peters Wallison’s presentation on “How Dodd-Frank Damaged Community Banks and Hurt Small Businesses.” Wallison, whose speech was part of our “Forum Series,” is a scholar at American Enterprise Institute (AEI) and a leading critic of Dodd-Frank and the federal government’s response to the 2008 financial crisis.
Some observers say that the financial crisis was caused by a mortgage meltdown. But Wallison wants to know, “Why all those very bad mortgages were in the financial system in the first place.”
Unlike those supposed experts who blame the financial industry, Wallison places the blame for the financial crisis squarely on federal affordable housing policies that created the demand for bad mortgages (and the bubble of overextended homeowners). It then doubled down by first bailing out Bear Stearns (actually its creditors) to keep markets liquid, and then reversed course when it let Lehman Brothers fail. “In other words, it reversed the policy that had caused everyone to believe that things were going to be stabilized by government action. The shock…is what caused the financial crisis…. Liquidity dried up. That was the financial crisis.”
The liberal explanation for the financial crisis that led to the passage of Dodd-Frank was that the private financial system and “greedy banks” were to blame. Banks made bad loans, to be sure, but it was actually federal policy coming out of HUD that required lenders to issue those bad loans that Fannie Mae and Freddie Mac then purchased. Most people do not understand how closely regulated the financial industry is, especially lending institutions like Americana Community Bank and TCF National Bank. They would not have made most of the loans that went bad if they had been free to set their own lending standards. It was the federal government telling them to lend to people who could not or did not make a down payment, and were unable over time to even make monthly mortgage payments.
Think of it as race quotas for mortgages.
I was working as corporate counsel at TCF National Bank before and during the financial crisis. While it has been a challenge for banks like TCF to adjust to the new regulatory environment, as a large bank, it was able to make the transition. It’s much easier for large institutions to absorb the cost of a massive regulatory regime like Dodd-Frank.
Wallison told the packed lunch crowd at American Experiment’s lunch forum, “We used to have about 100 new banks starting every year; now we have about three, and in some years we’ve had one.”
Smaller institutions, like Americana Community Bank, the ones that often lend to start-ups and local businesses, have been forced to consolidate or go out of business. “If the small-bank sector is not lending, then small business is not getting the credit it needs.”
This is certainly part of the regulatory puzzle for the new Trump administration to solve, and solve quickly in the coming years. “To sum up, the Dodd-Frank Act has put the federal government in substantial control of our financial system…That is why we have such slow growth.”
The Trump administration will have a willing partner in Congressman Tom Emmer, who shared some observations at the American Experiment lunch. Emmer sits on the House Financial Services Committee, which he referred to as “the plumbing of this country’s free market system.” He noted all the pictures of different businesses in Center Chairman Ron Ebensteiner’s office, noting that many started in someone’s garage. Emmer said he was following some good advice from Senator Rudy Boschwitz on how to be effective in Washington by focusing hard on getting a few things done, like improving start-up access to capital by reforming Dodd-Frank. Could it be that this regulatory web will actually be lifted and America can grow again? We wish him God’s speed.
Note: Peter Wallison is a frequent contributor to the Wall Street Journal, including this one yesterday, “What Dismantling Dodd-Frank Can Do: The market bump from Donald Trump’s win is peanuts compared with what regulatory relief can bring.”